Investing in Fixed Deposits & their tax implications

As debt instruments like Fixed Deposit (FDs) schemes have become more lucrative after cyclic increase in the policy rates by Reserve Bank of India (RBI), the investment in bank and corporate fixed deposits make a lot of sense, especially at this time. They are not only safe havens to park your money but also offering good returns of up to 10-11 per cent for 1-2 years. The interest rates are almost at the peak and there is a little hope of further increases.

Thanks to the inflation which is making mandatory requirement to increase the key policy rates. A steep increase in the key policy rates dent the huge liquidity enjoyed by the banks and they have to increase the interest rates to collect the money from the public.

The following table provides list of FD rates of banks:

* Senior citizens would fetch 0.25 � 0.50% additional.

Bank Deposits Vs Company Deposits

Here, as we about bank and corporate Fixed Deposit schemes, it becomes important for us to know the difference between the two so that we can take the right decision as far as investment in FDs are concerned. The prime difference between the two is that though corporate FDs offer 2-3 per cent higher interest rate per annum, they are not as safe as bank FDs. Bank deposits are generally safe investments because FDs up to Rs 1 lakh are insured under the Deposit Insurance & Credit Guarantee Scheme of India.

Hence, it is important for us to ascertain the stability of the company, its track record of giving returns. To judge this, the simple way is to keep in mind the following points before investing in corporate FDs:

• What is the rating given to the company�s fixed deposit scheme? These ratings given by credit rating agencies indicate the safety of the investments based on the number of criteria. Usually, AAA rating is considered safest.
• Company is issuing the fixed deposit to raise the money for its operations. Find out the liquidity of the company and its financial strength to repay at the time of maturity; otherwise, investors have issues on getting back their principal amount.
• Also, it is important to know that where you need to contact them to close the FD. Unlike banks, company FDs are not operated everywhere in the country.
• Read the complete terms and conditions of the FD and find out whether they allow the pre-close of the fixed deposit before the maturity.
  

Company Fixed Deposits forms are available through various broking agencies or directly with the companies. The minimum investment in a Company Fixed deposit varies from company to company. Normally, the minimum investment is Rs.5,000. For individual investors, there is no upper limit. In case of recurring deposits, the minimum amount is normally Rs.100 per month.

Drawbacks

• FDs are not �liquid� investments. It means if you invest your money in FDs, you will not be able to withdraw it until it matures. Generally, if you need to remove your money before the maturity, you will be able to do so by either losing the interest that you were supposed to earn or paying charges on it.
• Besides this, a particular interest rate is decided at the time of investment. If the interest rate goes up while your money is invested, you will not be able to enjoy it on your investment.
• By investing in FD, you cannot beat inflation as the returns offered on bank FDs are still less than the rate of inflation and it may prove to be a futile investment exercise.
• The rate of return mentioned in FDs is pre-tax returns and tax amount has to be deducted from it.

Tax implications

When you open a fixed deposit account in the bank, the interest paid will be taxable income and the banker will deduct the tax at source and pay you the remaining income to your account. This process is called as Tax Deduction at Source (TDS).

The interest income earned on any FD is taxable at the same tax slab as the customer is in. It will be added to his income in the year under the head �Other Income�. However, if the interest earned on FD is more than Rs 10,000 annually, bank cut the TDS at the rate of 10 per cent. In this case, bank will also issue you a tax certificate, which you can show at the time of filing the income tax return. However, if you have not submitted the PAN number while opening the fixed deposit, 20% would be deducted as the TDS. On the other hand, if the total interest amount is up to Rs.10000, bank does not deduct tax on it.

If the person is above 60, he/she can submit the Form 15H to avoid this TDS.
For those, who are below the age of 60 have to file Form 15G. For example, Mrs. X earns Rs.25000 from the interest in a year. She doesn�t have any other income and housewife. She is eligible to file the Form 15G and give it to the bank before March 31. In this case, the tax will not be deducted from the source.

One important point is that, these forms have to be submitted in each financial year to avoid the tax deduction. It is advisable to submit in the beginning of the year.

The NRI�s, who earn interest on their NRO�s account, are subject to 30% TDS.

Conclusion

A fixed deposit is best suited for those investors who want to invest a lump sum of money at a low risk and are comfortable committing it for a fixed period of time, and earn a rate of interest on the same.

- Satkam Divya

The author is the Business Head � Rupeetalk.com

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