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| Edited By: Harshil Mehta |Source: DNA |Updated: Mar 21, 2018, 06:18 AM IST
Features like capital protection and surety of returns made fixed deposits the favourite investment option among the masses. However, this is changing with more and more investors dabbling in equities and mutual funds. Despite this, FDs remain one of the most popular investment options. Acceptability of fixed deposits as collateral for loans up to 75% of the FD amount and the option of flexible maturity has also renewed investors' interest in them.
It is important to diversify the fixed deposit portfolio to meet different long-term and short-term financial goals. A fixed deposit as an investment option depends on the rate of interest; it is advisable to split the amount available for investment in FDs into smaller amounts, each at different tenures. This will help in safeguarding the investment from interest rate fluctuations by providing the investor with an option to reinvest the deposit on maturity besides ensuring a regular stream of income for the investor.
To earn better rates, one should look at FDs where the interest is compounded at shorter intervals like every quarter under the compound interest method. This is beside considering fixed deposits by companies, NBFCs and housing finance companies. FDs issued by non-banks should only be considered after careful consideration of their nature of business, their stability of business, their service network, and most importantly, their credit rating.
Although credit ratings have no impact on the interest rate offered by these company FDs in any way, they are a way to check the credibility of a particular entity.
Corporates, in order to win the trust of their customers, come up with innovative FD schemes to cater to the various class of investors. These FDs provide attractive interest rates and are backed by robust processes and technology that delights the customer. Many such products come with features which enable instant liquidity in case of health emergency besides offering the best interest rates. Some of these products even come bundled with attractive features such as cashless hospitalisation benefits, discounts ranging from 5% to 25% on various medical services, 24/7 doctor on call, free second opinion from a panel of specialists, etc.
Corporates are also coming up with varied and customised deposit options for different customer types like individuals, companies, societies, clubs and trusts with tenures ranging from 12 to 120 months. These schemes exclusively designed for trusts, societies, clubs and associations generally offer high interest besides tax exemption under Section 11 (5) (ix) of Income Tax Act, 1961.
This is beside specialised FDs for women investors and free accidental death insurance for individual investors. Fixed deposit products for women come with a higher rate of interest, and a free insurance cover in case of single deposit account and every first depositor in case of joint deposit account. These deposits can be started with an amount as low as Rs 10,000. Corporates are also giving an additional rate of interests to privileged women customers and senior citizens under the same FD schemes. Different finance companies accord privileged customer status to individual customers if they fall into the category of senior citizens, widows, armed forces personnel, etc.
Credit ratings of such fixed deposit products are often high and these products offer a certain amount of flexibility. Some corporates also provide an ATM-cum-debit card on FD investments with some limits but no extra cost.
Interest income on fixed deposits is taxable under the head 'Income from Other Sources' and investors need to pay tax depending on the tax slab under which they fall. Interest income from FDs up to Rs 10,000 is exempt from tax and TDS on the income above this limit is directly deducted by the bank at 10% if the PAN details are available and at 20% if PAN details are not available.
FD holders who do not have a taxable income bracket can submit a declaration form 15G to avoid TDS. This can also be done by individuals below 60 years, HUFs and trusts, etc. Similarly, senior citizens can fill Form 15H to avail exemptions on interest earned. This will help them avoid the exercise of claiming refund while filing returns.
Investors looking to save tax on interest earned from FDs have the option of investing in fixed deposits approved under Section 80(C). Select banks offer this deposit, and an investor can place a deposit up to Rs 1 lakh for a period of 5 years. Such an investment is eligible for deduction from taxable income under Section 80 C.
Fixed deposits are an attractive investment option for customers looking at stable, and assured returns. This is also a very good option for ensuring you get a fixed regular income every month. In the Indian financial system, there are limited product options which give you a fixed return, and fixed deposits are one of them. For risk-averse customers, these are undoubtedly one of the best investment option available today.
The writer is CEO, DHFL
