When you want to test your patience and still earn an assured return, an FD or RD is the best investment option for you. But before you invest in any of the two, you should form a clear understanding of both investment options. Though mutual funds are rising in popularity among investors, fixed deposits and recurring deposits are low-risk, high-yield investment options.
FD and RD are investment options that are being used for ages now. With these investments, you can get guaranteed returns for your investment. These investments don’t depend on the market for its returns, so you don’t have to worry about the market fluctuations. The interest rate for these investments is high when compared to mutual funds and other options.
Though these investments are prevalent among investors, many investors are still not aware of these investments. Here are those things that will provide you with a better understanding of these investments:
Covered With Insurance:
DICGC (Deposit Insurance and Credit Guarantee Corporation) provide an insurance cover for your deposit to the banks that come under the RBI norms. Under this program, when you are a depositor, you will be insured for your deposit up to Rs.1 lakh when the bank fails. This program covers the principal and interest component of RDs and FDs along with the savings and current accounts that hold the deposits.
You can get the protection of Rs.1 lakh separately for each of your deposits in each bank. When you are an investor who doesn’t want to take a risk with their money and wants to get a high yield, an RD or FD is the best choice for you. Even when the bank fails, you can avail up to Rs.1 lakh as insurance.
FD & RD Incomes Are Taxable:
Your FD and RD interest income will deduct TDS of 10% when it exceeds Rs.40,000 in a financial year. (Rs.50,000 for senior citizens) When you don’t provide your PAN card details, 20% TDS deduction will happen for your investment interest income.
Your tax liabilities will not end with just TDS. Also, the RD and FD interest will be taxable as per your income slab, except the deduction available under Section 80B. The variation between the TDS and tax liability will get adjusted when you file income tax returns. Make sure to factor your tax slab when calculating post-taxable returns on your FD and RD investments.
When you have this knowledge, it will help you in comparing the returns of FD and RD and other investment options well. When you nicely organise your debts and mutual funds, you can make sure to avoid missing out on your money.
Premature Withdrawal:
Many people think of opening an FD or RD because of the higher interest rate. Also, the short-term goals and liquidity requirements that come along with it. Emergencies occur without any warnings, and you should always be ready to face things as it comes to you.
Being well prepared for emergencies doesn’t mean you are wasting your time and energy; it’s just that you are acting smart. When you withdraw your FD or RD prematurely, it will lead you to pay the penalty towards it. The penalty that you pay towards your FD or RD will be 1% of the invested amount.
When you subtract the penalty with the interest you got, you will not have more benefit from it as you expected. So always make sure to be calculative with your tenure choices when it comes to FD and RD to avoid paying unwanted money. Short-term investment tenures with your FD and RD will save you from these unwanted penalties and provide you with higher liquidity options.
May Not Help Save Tax:
Many individuals open FD and RD mainly on their spouse and children’s name to show they have less or NIL income and avoid paying extra tax. But, it will not help save the tax that you pay for the interest income on your FD and RD. Though you open it on your spouse or child, you will have to pay tax according to your tax slab.
But when you open an account on your minor child’s name, you can club up to Rs.1,500 per year for each child. The interest that you earn for your FD and RD for the accounts that you opened for your parent’s, spouse or child will not come under your income.
Interest Income Is Taxable:
Tax saving FD is the only option that will help you avail up to Rs.1.5 lakhs of tax exemption in a financial year and qualify for tax deduction under Section 80C. But, these will come with a lock-in period of five years before that you cannot cancel and withdraw your deposits. Also, the interest that you earn for the FD will be taxable.
When you choose investments like these, it will become trouble when you are in an emergency financial situation. But, when you invest in ELSS (Equity Linked Saving Scheme) for saving tax and generating returns for five and more years, you can earn more.
ELSS is another low-risk investment with a shorter lock-in period of 3 years and can help you in reducing tax. ELSS is one of the most tax-efficient investment options that help attract LTCG (Long Term Capital Gains) of up to 10%, irrespective of your income slab. So always make sure to decide on your financial situations and needs before making any investment. Think before choosing the right tenure for your investment to benefit from it.
