Know Why Fixed Deposits Are A Safe Investment Option
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Bank fixed deposits (FDs) are one of the most popular investment instruments among risk-averse investors, particularly senior citizens. That is because they guarantee principal repayments and interest income at the booked rate regardless of any changes in the card rate during their tenure. However, despite being considered as safe avenues, FDs are not 100% risk-free in some cases.
Therefore, if you want to ensure the safety of capital as also to get the best rate of interest, then you need to keep a few important things in mind before putting your hard-earned money in fixed deposits.
Things To Keep In Mind Before Investing In Fixed Deposit
Here are 5 things to look at before opening an FD account:
1. Safety of Capital
The twin features of capital protection and income certainty are the prime USPs of opening a fixed deposit account with a bank. While PSU and large private sector banks are considered to be much safer, the degree of capital protection will also depend on how other banks have been categorised by the RBI.
2. Issuer Credibility
Though fixed deposits are generally considered as safe instruments, they are not 100% risk-free. The recent crisis in some NBFCs and co-operative banks has indicated why depositiors should be extra cautious while parking their money in a fixed deposit.
3. Interest rate
Interest rates of bank fixed deposits vary widely depending on the bank and the tenure chosen. At present, some small finance banks and private sector banks are offering highest FD slab rates of 7%-8.25% p.a., which is around 200-250 bps higher than the highest FD slab rates offered by public sector banks and large private sector banks. Remember that just like PSUs and other private sector banks, all small finance banks have also been categorized as scheduled banks by the RBI.
4. Liquidity And Time Horizon Of Financial Goals
Depositors should factor in liquidity and time horizon of their financial goals while choosing their FD tenure. Ignoring it can force them to close their FD deposits prematurely in case of financial exigencies or maturity of an overlooked financial goal. Premature withdrawals of bank FDs can cost the depositors premature withdrawal penalty of up to 1% on the effective interest rate, which is usually the lower of the original booked FD interest rate or the FD interest for the period for which the FD has been into effect at the time of its opening.
5. Taxation
The interest income on your fixed deposit is taxable as per your income tax slab. Earlier (till AY 2019-20), TDS was charged at the rate 10% in case the interest income on an FD exceeded Rs 10,000 in a financial year. However, in the interim budget 2019, the TDS deduction limit on fixed deposits was increased to Rs 40,000 annually (applicable from AY 2020-21). For senior citizens, the threshold limit for TDS on interest is Rs 50,000. Moreover, they enjoy deduction under Section 80 TTB up to Rs 50,000 for all interest received from banks, post offices, among others. including FD interest. Also, under the existing I-T rules, the TDS rate on FD interest is 20% if your bank does not have your PAN card details. However, if your income is below the taxable range, you can submit Form 15G and Form 15H to the bank in order to avoid tax deduction on your FD.
Conclusion
Fixed deposits are a safer investment choice than other risky alternatives. Aside from that, credit rating agencies rate and classify the capital invested by taking into account the securities and commodities that have been purchased. Because of the volatility and fluctuation of stock prices, income funds may be very unpredictable. As a result, they may not be a very good buffer for investments against market rate volatility. Investors with a strong risk appetite are encouraged to participate due to the absence of a rating system and an over-reliance on financial analysis of investment portfolios.
Also read- What Is Investing And What Does It Mean? Learn About Several Investment Options.
