Common Myths About Fixed Deposits

Fixed Deposits, also called as Term Deposits, are one of the most traditional investing options.

While we may be hearing a lot of noise around other investments like Mutual Fund SIPs, Liquid, Balanced and Debt Funds, Tax Free Bonds, PPF, EPF and what not! To some nothing beats the assurance and simplicity of a Fixed Deposit.
It’s a popular choice when it comes to showing investments on paper at the end of a financial year. But all that simplicity and assurance comes at a price! This article will help you remove some of the most common myths surrounding the Fixed Deposits and the interest accrued out of them. Read on, so that you are well aware next time you are investing in one.

 

Myth 1 – Fixed Deposits are only offered by banks

Fact – Fixed Deposits are also offered by other companies

It’s quite a general believe that Fixed Deposits are only offered by Government or Private sector banks. In fact, you can approach multiple leading companies and NBFCs (Non-Banking Financial Companies) who offer Fixed Deposits for retail investors.  And the catch is you are likely to enjoy better interest rates with these institutes as compared to bank deposits. Although these institutes may not give you attractive features like flexible tenure options, online account access and insurance cover on your fixed deposits.

 

Myth 2 – TDS (Tax Deducted at Source) on Fixed Deposits is mandatory

Fact – Knowing the mandates well could help avoid Tax Deduction

This is no myth that fixed deposits are taxable, however, not everyone needs to pay taxes. Yes you read that right! Returns from Fixed Deposits are included as a part of one’s total income under ‘income from other sources’. So, if your interest income exceeds Rs. 10,000 in one financial year, TDS will be 10%. For company deposits, TDS is deducted once interest exceeds Rs. 5,000 in one financial year. Minors, housewives, senior citizens, and people living on zero taxable income or no income, can most definitely avoid TDS. In that case, one needs to submit form 15G or form 15H to avoid TDS. If you’re over 60 years with no income, you won’t be losing any of your money on taxes, and can even enjoy a better interest on FD returns.

 

Myth 3 – All FDs Offer Tax Benefits

Fact – Select 5 year deposits offer tax benefits

Now if you are looking for tax saving, you will have to know that not all FDs offer that benefit. Tax benefits under section 80C of the Income Tax Act are offered only on specific deposits – for instance you’ll need to lock in your money for at least 5 years for this purpose. And during this time, the deposits cannot be pledged nor withdrawn.

 

Myth 4 – Regular interest payments on Fixed Deposits fetch more returns

Fact – A cumulative Fixed Deposit with returns only on maturity would fetch you more

Fixed Deposits come with two options, one where you receive interest payouts at regular intervals, and two a cumulative deposit where the whole amount (principal amount + bank’s interest) is received on maturity. The latter fetch you more returns. How? Well, that’s the magic of compounding. What happens in a cumulative deposit is the interest paid by the bank is compounded or multiplied at regular frequencies. So, higher the frequency of compounding, higher the yield on investment.

 

Myth 5 – Investing on an FD in the name of a family member helps saving taxes

Fact – Investing on an FD in the name of a family member doesn’t help saving taxes

Money gifted to spouse or children doesn’t attract tax. But when it comes to investment the income it generates is clubbed with the income of the giver and taxed accordingly. So, if you are thinking to invest in fixed deposits in the name of any family member, remember the interest will be taxed as your income. So, it’s best to avoid.

 

Myth 6 – In case of cash crunch, premature withdrawal is the only way

Fact – Fixed Deposits have other options in times of emergencies

If at any time you require money from your Fixed Deposits, most banks offer part withdrawal of funds, so that you could withdraw the amount you require taking care of the emergency, and the balance would continue to earn interest.

Henceforth, investing helps your savings grow – only if you truly understand how the concept works. At SBS Fin, we want our investors to indulge and understand wealth management as well as the money market instruments. Try and inculcate the habit of being up-to-date with the trends of the stock market and analyzing its ups & downs for better investing strategies. The same can be followed and assessed on our mobile app SBS FinFit, the same is available on Google Play and App Store.