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Fixed Deposit: The Simplest Way of Building Wealth

7 minsJune 25, 2018

If you are a risk-averse investor, who wishes to generate wealth securely and steadily, a bank fixed deposit (FD) is a worthy investment avenue.

Just remember to book your fixed deposit with a bank that offers a hassle-free experience after you’ve evaluated its financial strength and promoter history.

When you decide to invest, select your tenure thoughtfully. Carefully consider your liquidity needs and financial goals. In this context, sensibly choose between plans/options: cumulative and non-cumulative, i.e. the ones that offer regular interest pay-outs viz. a quarterly pay-out or monthly pay-out (considering cashflow requirements.)

For example, if you are a senior citizen and rely mostly on investments to meet retirement expenses, interest pay-outs directly to your bank would be a prudent choice.

On the other hand, if your objective is tax planning, looking for a cumulative pay-out (principal + accrued interest), and do not mind investing for the long-term, a Tax Saver Bank FD, which is subject to a 5-year lock-in period is a promising option.

Money invested in a tax saver bank FD is eligible for a deduction under Section 80C of the Income Tax Act, 1961. This tax benefit is available only to resident individuals and Hindu Undivided Families (HUFs). Joint holding, too, is permitted with a tax saver bank FD; but do note that only the first holder with a valid Permanent Account Number (PAN) is eligible for this tax benefit.

Similarly, for someone who is planning a short-term goal, say 18 months away or even for contingency purpose, reinvestment of interest, i.e. cumulative option, would be far better suited than regular pay-outs.

What about premature withdrawals?

You have the flexibility to withdraw your bank fixed deposit prematurely, i.e. before the date of maturity, but subject to penalty (1% lower interest than the contracted rate) and other terms & conditions of the bank.

However, do note that for certain variants of bank FDs, like the 5-year tax saver bank FD and Axis Bank Fixed Deposit Plus, prematurely withdrawals may not be permitted. Thus, thoughtfully book your bank fixed deposit based recognising the features, term and conditions, and above all your liquidity needs.

Can I get loan against bank FD?

Yes, in dire times your bank fixed deposit can serve to be the lender of last resort, to meet any sort of contingency requirement. You do not need to liquidate your bank FD.

Simply take a loan against your bank FD (in the form of an overdraft) and get access to 80-85% liquidity of your fixed deposit amount. The interest rate for loan against a bank FD is comparatively lower than for a personal loan.

Moreover, interest is charged on the actual amount utilised and tenure of utilisation. There are no EMI or post-dated cheques required as in the case of other loans. And the tenure of loan is as long as your bank FD is in force.

Tax implications on investing in bank FD

The interest earned on bank fixed deposit is brought to tax under the head: ‘Income From Other Sources’ of the Income Tax Act, 1961 and taxed as per your tax slab. To begin with tax is deducted at source by the bank, as per the prevailing rules.

Tax Deduction at Source (TDS), with respect to interest earned on your bank FD, is deducted on the basis of the total interest projected on the aggregate of your bank FD for the financial year. This is in accordance to Section 194A of the Income Tax Act, 1961.

If the total projected interest in a financial year crosses the threshold limit, which is currently Rs 10,000 for non-senior citizens, TDS is deducted proportionately from the existing fixed deposits at the time of interest application.

The union budget 2018 has increased the exemption of interest income on deposits with banks (includes fixed deposits) and post offices from Rs 10,000 to Rs 50,000. Thus, TDS will not be deducted for senior citizens, unless it crosses this new limit.

The rate for TDS is 10%, if PAN is furnished; and if not, TDS is 20%. No surcharge or cess is levied over and above this basic rate.

Hence, when you invest in bank FD to build wealth, also assess the post-tax returns you would clock. In case, you have no other income apart from interest income in order to avoid TDS, you can submit a declaration under Section 197A of the Income Tax Act in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens), as applicable.

To conclude…

Investing in bank fixed deposit carries benefits:

  • The returns are not market-linked – secured and steady
  • Higher rate of interest than a savings account can counter inflation
  • Conservative or risk-averse individuals and retirees can manage their cashflow
  • Worthy to plan short-term financial goals and contingency needs
  • Tax planning possible with a tax saver bank FD
  • Provides you the flexibility to choose your investment tenure
  • Liquid investment since you can prematurely withdraw
  • Obtain a loan against the bank FD (particularly when you do not have a credit history)
  • You can use it to get a credit card
  • A bank FD can be booked in a few minutes

At Axis Bank, in addition to a regular bank FD and a tax saver FD, there are couple of variants with distinct features:

Opt for the one that suits you the best while you endeavour to build wealth. You may book your bank FD offline (reaching out to your relationship manager at the bank or visiting your nearest branch) or online (via internet banking or mobile banking) ––the choice is completely yours.

Almost anyone can invest in a bank FD -- Resident individuals, Hindu Undivided Families (HUF), sole proprietorship firms, partnership firms, limited companies, Trusts, and so on. All you need is valid documentation. Also, do not forget to fill in the nomination form and submit it to the bank.

The minimum investment to book a bank FD varies across banks, but ranges between Rs 1,000 to Rs 10,000, while there is no upper limit. With Axis Bank the minimum investment is Rs 5,000 while there isn’t a maximum limit.

Book your bank FD today!

Investing in a bank or even a Digital FD can prove to be a safe harbour while you endeavour to generate wealth.

Happy Investing!

Happy Banking!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.