Fixed Deposits (FDs) are some of the most popular investment options for people across a wide range of the spectrum. However, there are a few facts that you may not be aware of as far as FDs are concerned. FD rates were going down over the last few years but have are rising slowly in the current scenario. The highest rates offered by most banks range between 6.5-7.6% per annum at present although there are other private players offering 7-8.25% per annum as well. There are small finance banks offering anything between 8.5-9% per annum too.
The DICGC (Deposit Insurance and Credit Guarantee Corporation), a Reserve Bank of India (RBI) subsidiary, offers insurance for all scheduled banks via the depositor insurance program. These include regional rural banks, commercial banks, small finance banks, branches of foreign banks, local area banks and co-operative banks. This program offers every depositor an insurance guarantee of Rs. 1 lakh in case of any bank failure. This offers coverage for the principal and interest components of FDs alike in tandem with recurring deposits and current and savings accounts.
Premature withdrawals of FDs lead to less interest earned. Often, in unforeseen circumstances, people break their FDs but most banks will charge up to 1.5% as the penal interest for premature withdrawals and deduct the same from interest rates effective while calculating out the final FD closure amount. To avoid such situations, always consider your overall liquidity and financial goals over the short term while choosing the duration of the FD. Tax Deducted at Source (TDS) is deducted by banks at the rate of 10% whenever interest income from a fixed deposit crosses Rs. 10, 000 in a particular financial year. TDS of 20% is deducted for people without PAN. TDS is deducted only on interest income for senior citizens, surpassing Rs. 50, 000 per annum.
Additionally, the interest income from FDs is also fully taxable. Senior citizens can get a deduction of Rs. 50, 000 under Section 80TTB. Interest income will be added to one’s total income for a year and will be taxed accordingly. Opening FDs in the names of your family members but in case or minor children or your spouse, the interest income will be clubbed with your income and will be taxed accordingly. There is just an exemption of Rs. 1, 500 per annum for every child. Interest income from FDs in the name of your parents or major child will not be clubbed with your income. Tax-saver FDs usually come with lock-in periods of 5 years. The principal amounts will be eligible for tax deductions up to Rs. 1.5 lakh per annum under Section 80C. However, interest earned will not be free from taxes.