Fixed bank deposits: 5 things to know before opening an FD account
Currently, bank term deposit interest rates are low, but for many investors, they remain the first choice for parking excess funds. After all, there is an implicit assurance that funds held in a bank are safe, and the likelihood of losing money is almost impossible. Therefore, even if the interest rates are low, at least the security of the money is there.
Many investors prefer to keep their funds in term deposits, settling for lower rates rather than holding funds in banks that offer a higher interest rate on their savings account. If you are an investor with term deposits in a bank or looking to open a term deposit account with a bank, here are some key things to consider.
Why FD bank
An FD bank is suitable for those who wish to keep the capital for a certain period. Money parked in an FD bank may not help you build wealth in the long run. The biggest advantage of bank FDs is that they offer the assurance of a fixed return and that the invested capital remains safe. Many investors keep only a portion of their funds needed for emergency use in bank FDs, as well as a portion in short-term or liquid funds.
Your money deposited in a bank is accompanied by a government guarantee of up to Rs 5 lakh. Deposit insurance of Rs 5 lakh is applicable per depositor and per bank and, therefore, is the sum of the amount between branches of the same bank. Bank deposits include money in the depositor’s savings account, current account, recurring deposit, fixed bank deposit which are insured by the DICGC. Importantly, the limit of Rs 5 lakh includes the principal invested and the interest earned on the principal. For a higher amount, most investors divide the total amount among the banks.
FD bank interest income is fully taxable in the hands of the investor and banks take TDS which can be adjusted when filing the tax return. The amount of interest income is added to “income from other sources” and then taxed. As the interest income is fully taxable and is barely able to beat inflation, the real yield of the FD bank is low and sometimes even negative. There are several banks where you can open FD bank, go for the ones that offer higher interest rate.
As a bank account holder, one would have already done the KYC and submitted the PAN. For those who have access to a bank’s online banking services, investing in FD Bank can be done entirely online. The investment amount can be directly transferred from the personal account and the FD board, a certificate showing proof of investments is generated immediately. At maturity, the redemption proceeds will go directly to the same account only. While there are banks offering a higher rate, opening an online bank account via KYC video has become much easier now.
In the event that you have fixed bank deposits where the interest earned is greater than Rs 40,000 during a fiscal year, the banker will reduce withholding tax unless your income falls within the exempt bracket. For seniors, the limit is Rs 50,000 for one year. Interest income from bank term deposits is subject to the TDS at 10 percent but may be deducted at 20 percent if the PAN is not provided. For a person whose total income during a fiscal year is within the exemption limit, Form 15G / Form 15H (by the elderly) may be submitted by the depositor to the bank to not deduct TDS. If a deposit is over a year old, ideally submit these forms each year in April.