How Fixed Deposits help during market volatility

6 MinsJune 16, 2022

The Indian equity markets have been very volatile for the last few months. For investors, particularly the newbies, it has perhaps been a nerve-wracking experience––almost atop of rollercoaster full of frightful upswings and downswings.

market volatility

Some reasons for the market volatility include macroeconomic factors such as Russia’s invasion of Ukraine, higher crude oil prices, supply chain disruptions, inflation overshooting the Reserve Bank of India (RBI’s) comfort range, and the RBI, along with many other central banks resorting to policy rate hikes to tame inflation, rise in bond yields, and Foreign Portfolio Investors (FPI) pulling out their investments.

At present, while equity markets are very volatile, allocating some portion of your investible surplus to risk-free instruments would be a sensible idea. Bank Fixed Deposits (FDs) can earn you fixed, secured, and steady returns, unliked market-linked instruments such as stocks and mutual funds.

To maximise returns on the bank FDs, keep the following points in mind:

  • As far as possible, choose the cumulative (also known as the reinvestment of interest) plan if monthly or quarterly interest pay-out isn’t your requirement.
  • Follow the FD laddering strategy, wherein you spread your lumpsum investment across maturities paying heed to your liquidity needs. In times when interest rates in the economy are likely to move up, this will potentially help you earn better returns.
  • As much as possible, avoid premature encashment of the FD, as doing this would put brakes on the power of compounding. Instead, when in need of money for whatever purpose, consider availing of a loan against your bank FD.
  • And at maturity, if you don’t require the money immediately, renew the FD for the desired period. This shall support the power of compounding and help you build a bigger corpus.

    To know how much returns your investment in a bank FD will earn, use Axis Bank’s FD calculator.

    [Also ReadOpen a Digital FD in minutes]

    If you follow a sensible approach, investing in bank FD can be a rewarding experience. Other than that, you could also save tax by investing in a tax-saver FD that comes with a 5-year lock-in period. Against the amount invested in a tax-saver bank FD, you will be entitled to a deduction (from Gross Total Income) of up to Rs 1.50 lakh per financial year (the aggregate limit) under Section 80C of the Income Tax Act, 1961.

    Keep in mind that the interest income earned on bank FD ––irrespective of whether a tax-saver FD or regular FD–––is taxable as per the current income tax law. It is assessed under the head “Income from Other Sources” and taxed as per your income tax slab.

    For regular depositors, if the interest income exceeds Rs 40,000 in a financial year, the bank first deducts tax at the source. For senior citizens, this threshold limit is Rs 50,000. The rate of TDS is 10% if PAN is furnished, and if not, then 20%. No surcharge or cess is levied over and above this basic rate. To avoid TDS, you may furnish 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 the bank.

    Furthermore, if you are less than 60 years of age and your total annual income from all sources is less than Rs 2.5 lakh, then even if your interest income exceeds Rs 40,000, you can avoid TDS by submitting Form 15G to the bank during the financial year. Likewise, for a senior citizen with a total income of less than Rs 3 lakh, even if your interest income exceeds Rs 50,000, TDS can be avoided by submitting Form 15H to the bank for the financial year.

    To avoid TDS, you may split your bank fixed deposit investments across financial years, alongside investing in different family members' names whose income is below the base exemption limit.

    Amidst volatile equity markets, FDs are a safe and convenient way to see your savings grow. Whether you are a risk-taker or a risk-averse investor, a bank FD is a must in your investment portfolio.

    So, book your bank FD today! You may invest in bank FD by visiting the nearest branch of the bank, or you may open a digital fixed deposit sitting in the comfort of your home, office, café, or wherever you are. At Axis Bank, you can open the Digital Fixed Deposit without an Axis Bank Savings Account by providing your basic details (such as Aadhaar, PAN, and mobile number).

    Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm. 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