What are Fixed Deposits?
A fixed deposit is an investment plan wherein investors deposits their money to get more returns compared to a savings account. It is offered by NBFCs (Non- banking financial companies) and banks. In fixed deposits, individuals add a lump sum amount of money for a fixed period to earn interest income. Here you have an option to choose whether you want to receive interest periodically or on maturity. And if for any reason you withdraw your deposited amount, you have to pay the premature withdrawal penalty.
Features of Fixed Deposits
As you have understood the meaning of fixed deposits, it's time to learn some features of fixed deposits:
- Fixed-rate of interest - This is one of the best features of FD. A fixed deposit is one of the most reliable and secure investment plans for anyone who wants to start their investment journey, as the returns on a fixed deposit are not affected by market volatility.
- Renewal and Flexible Tenure - You can start your fixed deposit for a period lasting from a week to 10 years. But before picking any fixed deposit plan don't forget to check out the interest on FD because the rate of return mostly depends on the tenure of the fixed deposit.
Advantages of Fixed Deposits
The majority of Indians are somewhere connected to fixed deposits due to the number of advantages of fixed deposit accounts. Following are the FD advantages :
- Secure investment plan - One of the important points among all FD benefits is a secure investment plan. If you are expecting a guaranteed return on your investment then fixed deposits are one such instrument which is best suitable for you because the rate of return on a fixed deposit is fixed and after a fixed period you will get back your principal amount with added interest on it.
- Low risk - Benefits of Fixed deposits include low risk because the rate of interest in fixed deposits is not affected by market volatility, which makes fixed deposits one less risky investment.
- Availability of Top-up loans - One such benefit of FD includes top-up loans. In a fixed deposit account, you can avail a loan against your fixed deposit in case you need any funds. So it is not only secure from a return point of view but you can also convert your fixed deposit into cash by taking loans.
- Benefit for senior citizens - Fixed deposit accounts benefit senior citizens more than normal citizens by giving a high rate of interest on fixed deposits. (0.5% higher rate of interest)
- Provides flexibility - Fixed deposits are providing the flexibility to receive interest periodically. Here you get an option of choosing monthly or quarterly interest as per your needs and you can also with the cumulative method and receive a lump sum on maturity.
Limitations of Fixed Deposits
If some plans have advantages to them, it also includes certain disadvantages. Let's look at some disadvantages of fixed deposits :
- Locked in funds - For a fixed duration, your funds will be locked in a fixed deposit. You have to go through a different process to get your money converted. So these funds will not be available for you unless you withdraw your funds.
- Penalties on withdrawal - If anytime you decide to do a premature withdrawal then you have to bear penalties on your withdrawal.
- Inflation has beaten the rate - Even though FDs have lots of advantages, the interest rate does not move in line with inflation. Simply said it means that in some cases, the deposit earns less than the inflation rate. And this is the reason why investors are losing their attraction for fixed deposits.
Taxability on Fixed Deposits
Interest earned from fixed deposits is chargeable under the Income Tax Act, 1961. Tax deduction on fixed deposit earnings varies from 0% to 30% depending upon the slab rate of investors.
If the earning of interest on a fixed deposit is more than Rs 10000 then TDS (Tax deducted at source) will be deducted at the rate of 10%. If you fail to provide pan card details when you open a fixed deposit with the bank the TDS will be 20%.
You can easily claim your exemption if your total income is under the tax slab of a minimum of 10%. But if your total income is more than the 10% slab rate (say 20% or 30%) then you will be entitled to pay extra tax along with the standard TDS rate.
Individuals can avoid tax deductions by submitting form 15G.
Conclusions
Even the individuals who have a low-risk appetite are investing their money in fixed deposits and this is what makes it the most reliable and sufficient financial instrument. If you are looking for a safe return and don't want to put your money at risk then a fixed deposit has no alternatives in the market.
But before investing in any kind of instrument in the market, you must give some time to your research and analysis.
Which is better: fixed deposits or stocks?
It depends on the investor. An investor who doesn't have a high-risk appetite chooses fixed deposits over stocks. Fixed deposits are for those investors who want a fixed return.
Which gives more return, fixed deposit or stocks?
Currently, fixed deposits can give a return of 7% in the market. Whereas stock returns are volatile and hence cannot be predicted.
How can I avoid tax deductions on fixed deposits?
You can avoid tax deductions on fixed deposits by submitting form 15G.
What if I take a loan against my fixed deposit?
If you are taking a loan against your fixed deposit then you have to pay penalties on your withdrawal amount.