The dual features of earnings certainty and capital protection make bank fixed deposits (FDs) one of the most preferred investment instruments for new and conservative investors. But lack of sufficient solution awareness concerning FDs generally cease depositors from realising maximum added benefits from their bank FDs.
Here I will explain some crucial facets of bank FDs that investors need to be conscious of:
1. Deposits up to Rs 5 lakh with each and every scheduled bank are covered beneath deposit insurance coverage
The Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of RBI, presents deposit insurance coverage cover for deposits opened with scheduled banks. The insurance coverage program covers cumulative bank deposits, which involve fixed deposits, savings account, recurring deposits and existing account, of up to Rs 5 lakh per bank per depositor in case of bank failures. Both the interest and principal element of bank FDs are covered beneath this plan.
As the Rs 5 lakh cover applies separately to the deposits held in each and every scheduled bank, risk-averse investors can benefit from higher-yield fixed deposits even though making certain maximum capital protection by distributing their FDs across a number of banks in such a manner that their cumulative deposits with each and every bank do not exceed Rs 5 lakh mark.
2. Penalty on premature withdrawals lowers your earning
Most depositors pick their FD tenure on the basis of the highest interest price out there, without having factoring liquidity and investment horizons. Unforeseen emergencies or more than-looked economic objectives can propel them to withdraw FDs prematurely and thereby, incur premature withdrawal penalty of up to 1%. The penal price is deducted from the helpful price of interest, which is generally the reduced of original card price and FD card price for the period the deposit has been into impact. Hence, ensure to factor in liquidity and investment horizon of your economic objectives to stay away from incurring premature withdrawal penalty and loss of interest earnings.
3. Depositor’s tax liability does not finish with TDS
Tax liability of FD investors does not finish with the deduction of TDS by banks. The interest earnings on your FD is taxable as per the tax slab of the depositor, except for tax deduction of up to Rs 50,000 out there to senior citizens beneath Section 80TTB. The distinction amongst actual tax liability and TDS quantity deducted gets adjusted at the time of filing earnings tax returns. Hence, generally issue in tax slab even though calculating post-tax return from FDs. Doing so will aid make far better comparison amongst the post-tax interest earnings generated by fixed deposits and post-tax returns from fixed earnings options like debt mutual funds.
4. Interest earnings from tax-saving FD is not tax-free of charge
Tax-saving bank FDs of up to Rs 1.5 lakh per economic year qualify for tax deductions beneath Section 80C. These tax-saving FDs come with a lock-in period of 5 years. However, just like non-tax saving FDs, the interest earnings from tax-saving FDs are also taxed according to the tax slab of the depositor.
The post-tax returns from tax-saving FDs may possibly not beat inflation in the course of low interest price regimes. Hence, investors seeking for larger post-tax returns from their fixed earnings tax saving instruments must favor tiny savings schemes supplying tax-free of charge returns.
Those with larger danger appetite can opt for Equity Linked Saving Schemes (ELSS). These tax-saving mutual funds are more tax-effective as only the capital gains booked beyond Rs 1 lakh in a economic year attract LTCG (Long Term Capital Gains) tax @ 10% irrespective of your tax-slab. These tax saving mutual funds also supply one the lowest lock-in period of just 3 years amongst all Section 80C solutions. Their extended-term returns also outperform FD returns by a wide margin more than the extended term.
5. FDs can be leverage to avail secured cards
FD investors getting nil or low credit score can leverage it to avail secured credit cards. As the transactions made through secured cards are reported to the credit bureaus, disciplined usage of secured credit cards can aid in constructing or improving one’s credit score. Such cards can also be useful for these who fail to avail standard credit cards due to other motives like inadequate earnings, unserviceable place, employer’s profile or job profile.
6. Availability of loan against FD to meet money flow mismatches
Most banks supply loans against fixed deposits, ordinarily in the kind of overdraft facility. A credit limit is sanctioned to the borrower based on the FD amount pledged as collateral and interest is levied only on the quantity drawn till its repayment. However, the borrower continues to earn interest on the pledged FDs in the course of the loan tenure. Borrowers can withdraw up to the sanctioned quantity from their overdraft account and repay it as per their repayment capacity.
These features of a loan against FDs make them an fantastic tool for mitigating frequent liquidity and cash flow mismatches, without requiring premature closing of FDs and incurring premature withdrawal penalties.
(The author is Director, Paisabazaar.com)