Fixed Deposits Vs Recurring Deposits: Investing in FDs or RDs? Five tips to keep in mind

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Updated: Jul 13, 2020 11:36 AM

The capital protection and income certainty features of fixed deposits (FD) and recurring deposits (RD) make them the most popular choice among risk-averse investors.

Banks deduct 10% TDS when the interest income from FDs or RDs surpass Rs 40,000 (Rs 50,000 for senior citizens) in a financial year.Banks deduct 10% TDS when the interest income from FDs or RDs surpass Rs 40,000 (Rs 50,000 for senior citizens) in a financial year.

The capital protection and income certainty features of fixed deposits (FD) and recurring deposits (RD) make them the most popular choice among risk-averse investors, and those investing for their short-term financial goals. Here are five facts which every FD and RD investor should know:

Up to Rs 5 lakh covered under deposit insurance

FDs and RDs opened with scheduled banks are insured up to Rs 5 lakh per bank per depositor in case of bank failures. Risk-averse investors looking for higher FD rates but with maximum possible capital protection can open high-yield FDs or RDs with small finance banks and some private sector banks and distribute them in such a way that their cumulative deposits in those banks do not exceed Rs 5 lakh in each bank. Small finance banks are scheduled finance banks and their highest FD slab rates are 200-300 bps higher than those offered by PSU and most private banks.

Tax liability does not end with TDS

Banks deduct 10% TDS when the interest income from FDs or RDs surpass Rs 40,000 (Rs 50,000 for senior citizens) in a financial year.For those who do not provide their PAN information to the bank, 20% TDS is deducted. However, interest income from FD and RD is taxable as per your income slab, except for tax deduction of up to Rs 50,000 available to senior citizens.

Premature withdrawal reduces your earnings

Premature closure of FDs and RDs have penalty of up to 1%. This penal rate is deducted from the effective rate of interest, which is lower of the original booked rate, or the FD or RD rate for periods for which the FD or RD has been into effect at the time of booking the FD/RD. So, factor in your liquidity requirement and the time horizon of your financial goals while selecting your FD or RD tenure.

FDs, RDs in name of family members may not save tax

To reduce tax liability, many investors open FD or RD in the name of their children or spouse. But opening FDs or RDs in the name of family members with no income source or falling in a lower income tax slab may not always save tax. The interest that you earn from the FD or RD opened in the name of your unemployed spouse is clubbed with your income and then taxed according to your tax slab. While the same rule is applied for FD or RD opened in the name of your minor child, an exemption of Rs 1,500 per annum per child is allowed. However, interest income earned from the FD or RD opened in the name of your major child or parents does not get included in your income.

Interest from tax-saving FDs aren’t tax free

Section 80C allows taxpayers to claim tax deduction of up to Rs 1.5 lakh each financial year for investments in tax-saving FDs. However, these tax-saving FDs have a lock-in period of five years. The interest earnings are taxable as per their tax slab, thereby reducing post-tax returns.

The writer is director & group head, Investments, Paisabazaar.com

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