Fixed deposits have been a rebuttal to the financial requirements of many individual investors, particularly senior citizens, who have been searching for a low risk return portfolio for their savings and creating wealth for better retirement planning. That being said, as a prospective fixed deposit investor, it is worthwhile for you to consider how the government can tax these returns and whether there is any tax gain on fixed deposit investments. Bank fixed deposits (FDs) normally deal with a huge variety of tenures, from 7 days to 10 years, in which the principal balance is deposited to get a fixed rate of interest against the capital parked. Premature withdrawals on FDs, though, are not available without paying a penalty. In the case of liquidity, only for the time retained will the interest available to the depositor will be paid. There are other methods that can be followed while investing in FDs to prevent such a circumstance.
Taxation and TDS applicable on FDs
For you, fixed deposits are a perfect way to secure capital from volatility and thus provide assured returns. Fixed deposit interests, though, contribute to a spike in your personal finance. Therefore, under income tax rules, the net gains you receive from a fixed deposit account are entitled to be taxed. Fixed deposit returns are taxed under the heading 'Income from Other Sources' under tax regulations. If the interest amount in a fiscal year reaches Rs 10,000, the TDS rate on fixed deposits (FDs) is 10 percent. This TDS deduction cap on FD is raised to Rs. 40,000 annually in the budget speech of 2019, which is effective in AY 2020-21. The TDS limit on fixed deposit interest is 20 percent under existing income tax laws if you do not furnish the bank with your PAN Card.
The TDS rate is 30 per cent for NRO (Non-Resident Ordinary) FDs. There are no TDS on FDs for NRE (Non-Resident External) and FCNR (Foreign Currency Non-Resident) as these are completely free from tax. In Form 26AS, the TDS specifics subtracted by the bank are recorded. For either Time Deposit (FD) or Recurring Deposit (RD) rendered with a post office, no TDS is withheld. Elderly people (those over 60) will get up to Rs 50,000 per year tax-free interest income and no TDS will be withheld for interest earned for them up to Rs 50,000 per annum. If the amount of TDS withheld increases the overall tax liabilities, the account holder can then modify the TDS against its overall tax liability or even seek a refund. On your fixed deposit, TDS is automatically imposed by the bank where you have established your FD account.
Many depositors for instance receive interest income in excess of Rs 40,000 or Rs 50,000 per year, but their net earnings plus interest received is less than the lowest possible exempt earning. The bank will not subtract TDS when there is no tax payable by the account holder or depositor. That being said, in such situations, you will have to submit Form 15G or 15H to the bank to welcome interest free income without TDS. Ideally, at the beginning of a fiscal year, Form 15G for non-senior citizens and 15H for senior citizens should be submitted at the bank to prevent the full inconvenience of the additional TDS deduction and seek ultimate refund from the IT department.
Tax benefits on FDs
In a fiscal year (under the Section 80C of the Income-Tax Act, 1961), an individual can seek an exemption of up to Rs 1,50,000 for capital invested in tax-saving FDs. These deposits will, though, have a 5-years of lock-in period and premature withdrawals are not permitted. In her Budget speech, Finance Minister Nirmala Sitharaman declared that senior citizens above the age of 75 will not be necessary to file income tax returns if they receive only pension and interest income. That being said, if they have some other means of income, this benefit will not be applicable.
The best ways to manage your FD
Depositors can avail a loan against the FD instead of withdrawing the fixed deposit and this facility is supported by most of the banks to their customers. The FD loan interest rate is typically 1-2% higher than the interest charged on the deposit, which, though, differs across the banks. Instead of going for a personal loan, analysts claim taking a loan against fixed deposits will help the depositor to make the best use of their deposit as the interest rates on loans against FDs are usually lower than the interest charged on personal loans. As some banks still offer the alternative to opt 90 per cent of the amount as a loan against your deposit.
For instance, without any processing fee and prepayment penalties, the SBI charges interest on a regular reducing balance for fixed deposit loans. The bank provides loans at a rate of 1% above the reasonably fixed rate of deposit. A sweep-in FD account can also be preferred by investors who are concerned for liquidity. Sweep-in accounts deliver not only the satisfaction of a savings account's liquidity, but also the rate of return of a fixed deposit. The interest rates are therefore similar to the standard if opposed to sweep-in fixed deposit account, and the liquidity advantages of a savings account can be add-on for depositors.
The penalty is therefore not charged for the use of proceeds or for early withdrawals from a sweep-in account. For this account, any balance in the saving account above the maximum cap is automatically transferred towards the FD account of the account holder. Additionally, withdrawals from the fixed deposit account can be rendered if there are inadequate deposits in the savings account, and deposits will be transferred back towards the savings account to cover the shortfall. Therefore, in the savings account, one is mandated to retain enough balance so that his or her fixed deposits are not affected. The laddering strategy, in which the depositor can best handle the interest rate exposure and thus have funds with liquidity, is another alternative.
A depositor can extend their investment through different tenures with this possibility. For e.g., you can deposit in one or more investment vehicles with different maturity dates, and even though you can diversify your portfolios through 1, 3, and 5-year FDs which can be a smart approach.