Investing in Fixed Deposits
Fixed deposits(FDs) are term deposits that yield a high interest in comparison to a regular savings account. A glaring difference between FDs and other types of deposits, such as demand deposits and recurring deposits is that one cannot withdraw the amount from FDs until the date of maturity.
FDs are safe investments while offering both short and long-term investment options. The tenure of an FD can be as short as 7 days and can stretch up to 10 years. Thus, FDs are among the most preferred investments by Indians.
Features of Fixed Deposits
While FDs have a fixed rate of interest, there are some ways in which one can increase the return from FDs. One of the best ways that one can gain a bigger return from FD is by laddering them. Laddering an FD means that you should distribute your funds in multiple FDs rather than one single FD. It would allow you to enjoy not only higher interest rates but also liquidity of funds at regular intervals. Furthermore, the risk is lower in comparison to that of mutual fund investments and stock market investments. Laddering FDs is highly beneficial if one has to withdraw from FD prematurely as the effect of loss would decrease.
It is also advisable that one should not withdraw from an FD until it matures. If you do withdraw from the FD before maturity, you would receive interest that has been accumulated after some deductions.
Interest income on fixed deposits is taxable under the head ‘Income from other sources’. TDS (Tax Deducted at Source) is deducted from interest earned on FDs by the financial institution upon maturity of FD. As per Section 194A of Income Tax Act, TDS is deducted at the rate of 10 percent if the income from interest on FD is above INR 10,000. However, FDs present an effective tax saving opportunity for people to invest. The fixed deposits with the maturity of 5 years or above are considered as Tax saver fixed deposits as the investors can avail deduction for the amount invested in it as per Section 80C of the Income Tax Act.