Did you know fixed deposits are considered a safe financial investment? Yes, you read that right. For an Indian citizen, fixed deposits can bring lucrative financial security. But everything in this world has a good and bad side. So, this post presents the benefits of tax-saving fixed deposits and their advantages and disadvantages. Let's delve into the post to learn further about the perks of these deposits first:
What are the pros and cons of tax-saving fixed deposits?
Perks of Tax-Saving Fixed Deposits
1. Available Seamlessly
A Fixed Deposit scheme has easy availability. So, it is easily available to India's public &private sector banks. One can also open an FD account via online mode. You don't require visiting the bank in-person. If you have your KYC, the formalities can be done at the bank itself.
2. Offers Great Returns
Another benefit is that FD comes with guaranteed returns. Simply put, the rate varies from 7 % to 8 %. Factually, the interest gains of the FD account may vary with the tenure. So, the long-term FD offers better gains.
3. Partial Withdrawals Offering
A few banks provide account holders with FD schemes for partial withdrawals. Upon withdrawal, the balance remains in the FD accountand will get a similar interest. Such fixed deposits are lucrative, and you can use them to withdraw money in the future, especially during any urgent or crisis period.
So, what is the rate for ? Considering interest rates of 7%, 7.5%, and 8%, the amount is Rs 583.33, Rs 625, and Rs 666.66, respectively.
4. Tax Exemption
The next benefit is tax exemption. This original monetary amount that the depositor deposits in FDs is exempt from taxation. The fact is that both workers and business persons use FDs. This section provides the exemption of 1.5 lakhs towards the FD deposit.
5. Automatic Renewal
The next benefit is that it can be automaticallyrenewed. You don't need to visit the bank physically for the renewal. You can easily manage the step via online banking.
6. You can open FDs in varied numbers
You can open any number of FDs at the bank or multiple banks. As a matter of fact, the FDs represent a great process of investing money for future savings. You can open 5-year tax-saver FDs for higher tax benefits under Section 80C.
7. Loan Facility
The next benefit is the loan facility. The FD can get used for getting the loan. A loan facility can help a depositor to get finances when they need them. A loan can extend around 90% of a principal and an interest accrued on that amount.
These types of investments come with utmost security. So, there's no market fluctuation that will affect interest rates. The best example of this type of investment is the Mutual Fund. To speak in simple terms, an FD's interest rate remains fixed during the time period, as long as it reaches maturity.
9. Improved Interest Rates for Older Adults
So, FDs also come withbetter rates for seniors. The interest rates vary based on their bank chosen&FD's tenure. It might be 10% or less. So, senior citizens might gain much larger income via deposits. So, it can benefit senior individuals.
10. Option of Opening Single or Joint Account
More than one individual may open an FD together via a joint account. Any account member may withdraw or can deposit money. This makes the FD accounts easier to operate and maintain.
11. Open to HUFs
Any Hindu family member may together form the Hindu Undivided Family or HUF. They can open the Fixed Deposit. A family might save taxes by opening a HUF account, as it is taxed separately.
12. Benefits for NRIs
NRIs may also open FDs and invest in them. They can deposit INR or any foreign currency. Indian banks provide them with customized fixed deposit plans. The accounts offer multiple benefits.
Besides, fixed deposits are easily transferrable, open to everyone, and have no TDS. However, there are a few disadvantages too. Here are they:
Disadvantages of FDs
1. Interests are Taxed
Interests gained on fixed deposits are completely taxed upon. The fact is that the income is denoted under the head: Income from the Other Sources while filing the ITR.
Other financial instruments are also available. And they can offer some benefit of tax-free benefits. Government bonds and PPFs are the best examples.
2. Lower Interest Rate
It is true that the FDs may give you benefits of 10%higher interest rate. Other investment avenues are also involved. Mutual fundsare one of them that offer returns of20% or 30%. There are other risks with MF.
3. TDS Taxation
Interests gained from the FD are charged with the TDS. The banks may reduce it from interest accrued at every year's end. However, the depositor may opt out of the TDS &pay all the interest at the time of maturity.
Here are the TDS taxation rate conditions for fixed deposits:
If the FD depositor doesn't have an income of over Rs 2.5 lakhs, there will be no TDS deducted from an FD interest. To ensure that the bank understandsabout the low income (considering a homemaker and low-earning individuals), one should submit a 15 G form and 15 H From at the concerned branch.
4. No Increase in Interest
Fixed deposits have the same interest for complete tenure. The gains remain fixed & wouldn't increase. The FDs are only good for short-term tenure saving. They are tax-free, but FDs might also be used for short-term savings. So, that might give greater returns! The secure deposits offer tax exemptions &useful for people who don't have an appetite for financial risk but want interest rates.
5. Interest Rate can be lower than Inflation
At times, the inflation rate can be even higher than the FD's interest rate.
So, you have learned the advantages and disadvantages of tax-saving FDs.