It is an era of low interest rates, In India and globally. In fact, interest rates in some countries have turned negative for banks.
Not a very good environment and the best way is to make the best use and squeeze the maximum out of your fixed deposits.
1) Chase yields and not interest rates
Interest rates are always lower than yields. For example, look at yields and not interest rates. Banks, compound your amount every quarter, which means yields go higher. For example, if a bank offers you an interest rate of 7 per cent over 2-years, your yield could go as high as 7.50 per cent.
Tax free bonds do not compound interest, which means if you get 7 per cent, it remains 7 per cent. Company fixed deposits tend to compound interest rates every year. So, the yield is not very high there.
Banks may not offer you the highest interest rates when compared to company deposits or NCDs, but, they compound interest rates every quarter, which increases the yield.
2) Split the fixed deposits to reduce tax
If you are placing money in fixed deposits, do remember that the interest attracts tax. If in a bank deposit, the interest is above Rs 10,000, a TDS would be deducted.
On the other hand, if it is a company deposit, there would be a TDS if the amount of interest goes beyond Rs 5000.
So, what you need to do is, cleverly split the FDs, where you believe the interest rate will exceed and there would be a TDS.
Let us cite an example. If you place an FD of Rs 101,000 and the applicable interest rate is 10 per cent, the bank would cut TDS as the threshold limit of Rs 10,000 would be crossed.
In this case, you can place the money in fixed deposits of Rs 50,500 and Rs 50,500 in two different names.
Remember, only TDS is not deducted. If you are in the tax paying bracket and have taxable income, you would have to the pay the tax on the interest income, when filing your returns.
3) Place money in cumulative deposits
Try and place money in cumulative deposits, because you gain money from compounding. Larger time frames also tend to offer you better interest rate, though it may not always be the case.
4) Look for company fixed deposits
One way of making more money from fixed deposits, would be to look at company fixed deposits. For example, they tend to offer you an interest rate that could be almost 1 per cent, over and above that offered by bank deposits.
The tax liability on bank deposits and company deposits are almost the same.
5) Submit form 15g and 15h
If you believe that you would not have any taxable income during the year, it makes sense to submit for 15g and form 15h. This would ensure that the bank does not deduct any TDS.
If you adopted the above methods, you can reduce tax and make more money from fixed deposits, given that yields have fallen dramatically in the last few months.