Thursday, 10 March 2016

Bank fixed deposits in India

Bank fixed deposits also known as term deposit are one of the oldest and one of the most favoured investment avenue and why shouldn't it be that way?

  • FDs provide flexibility in term of duration you have option from 7 days till 10 years.
  • Interest rate is guaranteed for the tenure of the deposit, it won't fluctuate. So no risk of ups and downs.
  • FDs can be broken in between of course with some penalty.
  • FDs also provide rebate under Sec 80 C, provided fixed deposit is for 5 years.

Reading all this any reader may think with all these benefits and ease of opening (yeah Online!) and closing why should anybody even bother about any other mode of investment?

Well with all these benefits the FDs lack the most important punch, return on your investments. FDs come under ETE (if it's a tax saver 5 year FD) or TTE so taxes take the substantial part of your returns if you come under any of the income tax slabs.

That is one and most important reason you should look for other investment options like Public Provident Fund, Sukanya Samriddhi Yojana, National Pension Scheme if you're averse to the risk and Mutual Funds and stocks if you can take some risk.

How to open a FD

Any individual, Hindu undivided family even private/public limited companies and societies are eligible to open a FD with a bank. Here I'll concentrate more on procedure for individuals and HUF.

For individuals procedure for opening a FD is similar to opening a saving account. You need to furnish residential/ID proof.

Just like joint accounts you can have joint fixed deposit account too.

Identity proof

  • Passport
  • PAN card
  • Voter ID card
  • Driving licence
  • Government ID card
  • Photo ration card
  • Senior citizen ID card

Address proof

  • Passport
  • Telephone bill
  • Electricity bill
  • Bank Statement with Cheque
  • Certificate/ ID card issued by Post office

Online facility - If you already have an account with the bank where you want to do a fixed deposit you can also do it online.

FD receipt

If you are not opening a FD online you will get a FD receipt from the branch which you need to carry when your fixed deposit matures.

In case it has been opened online many banks just send a receipt by email.

How interest is calculated

Right now (FY 2015-16) most of the commercial banks are offering interests in the range 7-8% annually but the interest on term deposits is mainly calculated on the quarterly basis.

If you have opted for the quarterly pay-out then that interest is deposited to your account. If the interest is reinvested then the interest is compunded to the principal amount on a quarterly basis.

In case of monthly deposit scheme, the interest shall be calculated for the quarter and paid monthly at discounted rate over the Standard FD Rate.

Please check with your bank for the prevailing interest rate and the interest pay-outs.

As example - If you have deposited a sum of Rs. 10,000 for 2 years at the annual interest rate of 7% then the interest will compounded quarterly for this period.

Compounded amount = principal x (1 +r/n)nt 

Where n is the frequency when the interest will be compounded, in this cases it is quarterly so it is 4 times in a year.

T is the time period which is 2 in this case.

So calculation is -

10000 x (1 + 0.07/4)8 = 11488.82

Thus interest earned = 11488.82 - 10000
                     = 1488.82 Rs.

Interest rate for senior citizens

Fixed deposit interest rate for senior citizens (60 years & above) is generally 0.25-0.5% higher than what is offered to others.

So if general rate of interest offered for 1 year FD is 7.75% then senior citizen will get interest rate of 8.25% for the same FD.

Deduction under Sec 80C

Tax saver FD meaning FD for the tenure of 5 year or more is eligible for exemption under Sec 80C. Since maximum amount for deduction is 1.5 lakhs in a fiscal year now so that is the maximum amount you can claim under Sec 80C for a tax saver fixed deposit.

If you have opened a tax saver fixed deposit then there is a lock in for 5 years.

In the case of joint deposits, the Tax benefit under 80C will be available only to the first holder of the deposit.

Liquidating fixed deposit

Due to some emergency if you want to break your fixed deposit and withdraw the money before the FD matures it can be done with some riders.

In case you break your FD the interest rate calculated will be lower of -

  • The base rate for the original/contracted tenure for which the deposit has been booked.
  • The base rate applicable for the tenure for which the deposit has been in force with the Bank.

As exp if you booked a FD for say 3 years and interest rate for it was 8% but break it after one year. If for one year the prevailing interest rate is 6% then that is the interest rate you'll get for you FD as you are actually keeping it for one year rather than the originally planned 3 years.

On top of that there is also a penalty of 0-1% depending on the bank. So, in case your bank is levying a 1% penalty on the pre-mature withdrawals of the FD then your interest rate becomes 5%. So the formula for calculating pre-mature withdrawal of FD is -

Interest rate for liquidating FD before it matures = prevailing interest rate for the tenure FD is actually kept - penalty percentage

Tax deduction at source(TDS)

Interest earned on FD is taxable. That interest should be added to your regular income and taxed according to the income tax slab you fall into.

Apart from that tax on the interest, income on the FD should be deducted at source (Bank in this case) @10% if the interest income from FD in a year is more than Rs. 10,000 (If PAN details are not submitted to the bank then TDS will be 20%).

So if there is a TDS on your FD (you can check 26AS for the same) then at the time of filing your tax return you have to provide all those details like actual interest earned, TDS already done and based on your slab if even after the tax deducted at source your liability is more you need to pay those as taxes.

As exp. Suppose you have a FD of Rs. 2 lakh @ 8% interest rate, which means in a year your interest earned is Rs. 16,000 (calculating using Simple Interest just for simplicity). Since it is more than Rs. 10,000 so TDS @10% will be done. That means bank will deduct Rs. 1600 as TDS.

Now if you come under 30% tax slab, on this interest income you need to pay tax of Rs. 4800. Since 1600 is already deducted you are liable to pay Rs.3200 more as taxes.

Form 15G/15H - In case your annual income is less than any tax slabs then you need to tell the bank not to deduct any TDS. For that you need to fill and submit form 15H if you are a senior citizen or 15G if you are not a senior citizen.

Loan against FD

As an alternative to breaking your FD in case of some emergency you can also take loan against your FD. Loan against fixed deposit is given in the form of an overdraft against your deposited amount.

Depending on the bank you may get 70%-90% of the value of your FD as loan. Interest charged on the loan is usually 2-3% more than the term deposit rate.

The tenure of the loan is same as the remaining tenure of the FD on renewable basis. Loan amount can be repaid in EMIs or as lump sum, you have to get that information from bank.

Note that your FD will continue to earn interest in that period. But you cannot close FD if you have taken loan against it though renewal can be done.

Nomination facility

It is always better to use nomination facility as it facilitates faster and easier release of funds without insistence on Succession Certificate /Probate of Will.

Nomination facility is available for bank fixed deposits. Nomination can be made in favour of one person only. It can be cancelled or changed subsequently by the depositors.

Nomination in the favour of the minor is permitted but in that case another individual (who is not a minor himself) has to be appointed who can receive the amount of the deposit on behalf of the nominee.

That's all for this topic Bank fixed deposits in India. If you have any doubt or any suggestions to make please drop a comment. Thanks!


Related Topics

  1. Bank Deposits - A loss making investment
  2. EEE EET ETE explained
  3. What are the tax exemption benefits of PPF?
  4. Post Office Monthly Income Scheme

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3 comments:

  1. After reading your this post i can say that i have clearly understand the topic which you mention in the post. Thanks for such a great information.

    ReplyDelete
  2. I have one doubt if customer is non government employee....his annual income is 3.5 lakhs and did not show his income details and earn interest on FD is 30000....is TDs is applicable to his FD?

    ReplyDelete
    Replies
    1. As you said employee so I am assuming still working and not a senior or a super senior citizen. In that case exemption limit as per current income tax slabs FY 2015-16 is Rs. 2,50,000 (Two lakh fifty thousand Rs). If you are earning more than the minimum exemption limit then TDS will be there.

      Delete