Fixed deposit (FD) is deemed one of the most secure investments in the Indian market. A fixed deposit offers a guaranteed rate of interest until maturity. The interest rate can vary from one financial institution to another. Therefore, the investor should compare the FD rates of different institutions before selecting one.
Fixed deposit interest rates have been declining over the past few years. The Reserve Bank of India (RBI) has been reducing the repo rate, which is the rate at which it lends to financial institutions. This has resulted in a reduction in the interest rates on most financial products, including fixed deposits.
Fixed deposit interest rates are expected to be lower than the current rates, mainly due to the ongoing economic slowdown and the effects of the COVID-19 pandemic on the market. This makes it all the more important for investors to understand the tax implications of investing in fixed deposits.
Tax Implications of Fixed Deposits
Interest earned from fixed deposits is taxable under the head ‘Income from Other Sources’. The tax is deducted at source (TDS) by the financial institution if the interest earned exceeds a certain threshold.
For individuals below the age of 60, TDS is applicable only if the interest earned from all fixed deposits across all financial institutions exceeds Rs. 40,000 during the financial year. For senior citizens, the threshold limit is Rs. 50,000.
The TDS rate is 10% if the PAN (Permanent Account Number) is furnished to the financial institution, and 20% if not. However, individuals can claim a refund if the TDS amount is higher than the actual tax liability.
Investors should note that the TDS deducted by the financial institution is only an interim tax. The actual tax liability depends on the investor’s total income, and hence, they should calculate their tax liability and file their income tax returns (ITR) accordingly.
If the tax liability is less than the TDS amount, the investor can claim a refund of the excess amount while filing the ITR. However, if the tax liability is more than the TDS amount, the investor has to pay the additional tax.
It is essential for investors to keep track of their TDS, interest earned, and total income to accurately calculate their tax liability. They can use the Form 26AS from the Income Tax Department’s website to ascertain the TDS amount deducted by the financial institution.
Additionally, investors should note that interest earned from fixed deposits is added to the investor’s total income and taxed at the applicable slab rate. Therefore, investors falling under higher tax brackets may have to pay a substantial amount of tax on the interest earned from fixed deposits.
Fixed Deposits and Inflation
Investors should also consider the impact of inflation before investing in fixed deposits. Inflation reduces the purchasing power of money over time. Therefore, if the inflation rate is higher than the FD interest rate, the investor may end up losing money, even though their investment has earned interest.
For instance, assume an investor has invested Rs. 1,00,000 in a fixed deposit for one year with an interest rate of 6%. After one year, the investor would earn a total interest of Rs. 6,000. However, if the inflation rate during that year is 7%, the value of money would have reduced, and the actual purchasing power of the investor’s money would be lower than before, even though they received interest.
Investors should consider other investment options that have a potential for higher returns, such as equity mutual funds, while keeping in mind the risks involved in such investments.
In conclusion, while fixed deposits are considered a secure investment option, it is essential for investors to understand the tax implications and other factors that can impact their returns. It is recommended that investors compare FD rates of various financial institutions and gauge the pros and cons of other investment options before making investment decisions.
Disclaimer: This article is meant to educate investors and provide general information about fixed deposits and tax implications. Investors are advised to consult their financial advisors and evaluate their investment options based on their individual risk appetite and financial goals. The author and the publishing entity do not endorse or recommend any particular financial product or institution. The investor should evaluate all the pros and cons of trading in the Indian financial market.