With interest rates falling in India since January 2015, the rates on bank FDs were almost down to unattractive levels. In the last few months, the bond yields are again back above 8% and that has given a slight fillip to FD returns. Additionally, banks are also offering sweeteners in the form of higher rates on FDs as they work hard to increase their CASA deposits. But how do you handle this deluge of deposits information and which one do you choose. Don’t just go by high interest fixed deposits but also look up the fine print. Here are five tips on how to invest in high interest fixed deposits and get the best deals in the market.
Even for bank deposits you can shop around
Bank FDs in the past were necessarily opened with your traditional family bank only. Not any longer! Deposit syndicated information helps you to compare various deposits offered by banks and make a conscious and intelligent decision. When you have surplus funds you can certainly consider investment in a high interest fixed deposit. But, why be in a hurry to jump on the first bank available. Look around for different banks as they offer different interest rates on their fixed deposit. Since most bank deposits have a similar profile, as well try and get the best rates.
Don’t put all your eggs in one FD basket
The best you can do is to spread out your FDs across a few banks so you can see the difference in service standards and then take a call. The interest on a fixed deposit varies with the amount that you want to invest and the tenure that you want to invest for. Higher the tenure, higher the returns you get. Also, you can earn higher returns in case you are senior citizen.
If you can lock in your funds for 5 years, opt for tax saving FDs
You can invest in a tax saving FD to be safe from paying taxes on your earnings from fixed deposit. A Tax Saver Fixed Deposit comes with a lock in period of 5 years which disables you from breaking your fixed deposit before that. If you break your tax saver FD before maturity, then the amount invested will not qualify for tax deductions. In fact, any deduction claimed by you will be added back to your income. This is one thing you should be wary of at all times when you get into a tax saving FD. Only get into it if you are prepared for a compulsory 5 years lock in.
Be aware of the tax implications of FD investment
When you invest in a tax saving FD with a five year lock in, then you are entitled to an annual exemption of Rs.1.50 lakhs. Of course, this is a blanket limit including other options too. What about the interest on an FD? One of the most important things to consider is the tax liability. You should be aware of the fact that the earned interest on fixed deposit is taxable with the income bracket you fall in. If you earn more than Rs 10,000 interest on your FD, the amount above Rs 10,000 becomes taxable. In the case of senior citizens, this limit for tax exemption on bank FDs has been raised to Rs.50,000 per year effective the Union Budget 2018. If you want your earnings from taxes, you can invest in a tax saver fixed deposit. Bank FD interest is added to your total income and taxed at your peak rate of tax applicable on any interest income beyond Rs.10,000 per annum in case of ordinary assessees and Rs.50,000 in case of senior citizens.
You must also know about the penalties of premature withdrawals
If you want the funds invested in fixed deposit before maturity, you might have to pay penalty for premature withdrawals. You can also borrow against your FD but that will result in a higher rate of interest payable on the loan. You should consider withdrawing from a fixed deposit only if it is an emergency. If you withdraw your fixed deposit before maturity, you have to pay a penalty and your rate of interest will change taking into consideration the tenure of your fixed deposit. Also when you withdraw your FD prematurely, you lose out on the benefits of reinvestment of your intermediate receipts. You need to consider all these before opting for the FD.
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