Fixed Deposits in India: A Comprehensive Guide

Introduction

Fixed Deposits (FDs) are a popular investment option in India, known for their safety, stability, and relatively attractive interest rates. They are offered by banks, Non-Banking Financial Companies (NBFCs), and post offices.

Features of Fixed Deposits

• Investment Tenure: The investment tenure of FDs ranges from one day to several years, and it varies across banks
• Interest Rate: The rate of interest provided on FDs is much higher than that of a regular savings bank account
• Senior Citizen Benefits: Senior citizens are provided with slightly higher returns (0.5% higher)
• Withdrawals: Partial or full withdrawals are permitted, although penalties may apply
• Tax Benefits: Taxpayers can invest in tax-saver FDs to save taxes under Section 80C
• Loan against FDs: Loans against FDs are available

Downsides of Fixed Deposits

• • Inflation Risk: Interest rates of FDs remain fixed for the tenure of the deposit. So, if your FD gives you 5% interest but the inflation rate in the economy is 6%, you are probably receiving negative interest on your investment in the FD.
  • Penalty on Premature Closure: If you want to withdraw money before the tenure ends, you may be charged for pre-closure as a penalty, and the interest earned so far may also be deducted before crediting the principal amount.
  • Taxable: The interest earned on FDs attracts TDS (tax deducted at source) of 10% if the interest earned is beyond Rs 40,000.

Fixed Deposits vs Inflation

FDs might not be able to beat inflation, especially if you fall into the highest tax rate of 30 per cent. For example, HDFC Bank is offering a one-year FD at 6.6 per cent. After taxes, the return works out to 4.62 per cent, which is below the expected inflation rate of 5.1 per cent for FY24.

Current Market Returns

As of now, the FD interest rates for the general public range from 3.00% p.a. to 9.50% for tenures from 7 days up to 10 years. Senior citizens are offered interest rates higher by 0.50% to 0.75% of the rates offered to the general public.

Tax Implications

Interest income from fixed deposits is fully taxable. It is added to your total income and taxed at your applicable income tax slab rate. It is to be reported under the head ‘Income from Other Sources’ in your Income Tax Return. Banks deduct tax at source at the time of crediting interest to your account if the amount of interest is beyond Rs.40,000 for individuals other than a senior citizen (in the case of a senior citizen the threshold is Rs.50,000).

Risks of Fixed Deposits

Liquidity Risk: FDs can be easily liquidated. However, a penalty could be levied. Tax saver FDs cannot be withdrawn before completion of the 5-year tenure.
Default Risk: Bank defaults are rare but possible. However, deposit amount including interest of up to Rs 5 lakh per person per bank is guaranteed by the DICGC.
Inflation Risk: FD returns at times can be around the same as inflation or even lower than inflation rates leading to wealth erosion for the investor.
Interest Rate Risk: FDs carry the risk of being locked in for a long tenure at a low rate of return.
Reinvestment Risk: In a falling interest rate environment, FDs that are due to mature will get offered a lower rate at the time of maturity.

Fixed Deposits for NRIs

Non-Resident Indians (NRIs) can also open FD accounts in India. However, the rules and regulations are different from those for resident Indians. NRI FDs are subject to certain restrictions and conditions, and the interest earned on these deposits may be subject to taxes in the NRI’s country of residence.

In conclusion, while FDs are a safe and popular investment option, it’s important to consider their features, downsides, tax implications, and risks before investing. Whether you’re a resident Indian or an NRI, understanding these aspects can help you make an informed decision about investing in FDs. Remember, investing is a journey, not a destination. Happy investing!

Disclaimer: The information provided in this guide is for general informational purposes only. It is not intended as legal, financial, or investment advice. Always consult with a qualified professional before making any investment decisions.