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Fixed Deposits – Basics Elaborated

Published On 03 Apr 2010 By . Under: Fixed Deposit. Tags: ,   
 

What is a fixed deposit? What is the relevance of fixed deposits in India?

Fixed Deposit is the most common form of savings all over the world, specially in India. A Fixed Deposit involves locking a certain amount of money for a certain time period with a government approved institution, it can be a bank or a corporate offering fixed deposits to raise money for its business, etc.


Benefits of Fixed Deposits

The major benefit of fixed deposits is its higher interest rate when compared to interest rate in a regular savings account (which is fixed at 3.5%).

Is interest rate on fixed deposits fixed?
The interest on Fixed Deposit varies with the state of economy, being much higher when inflation is high (so that people save more and spend less), sometimes being as high as 10% per annum , to as low as 5% per annum, when economy is going good and inflation is low.

Is interest on fixed deposit taxable?

Yes, the interest on fixed deposit is taxable. The interest earned from fixed deposit should be added to your taxable income and tax should be calculated as per existing tax slabs.

I have heard of tax saving fixed deposits? What are they? Are they taxable too?

Tax saving fixed deposits come with a fixed tenure of 5 years. The amount invested in the tax saving fixed deposit is exempt from tax (during the calendar year in which fixed deposit was created) under Section 80C under the Income Tax Act (upto a maximum limit of Rs 1 lakh).

Conventional Deposit methods - Fixed Deposit
However interest earned from tax saving fixed deposits is taxable too.

Can i break fixed deposit before maturity in case of an emergency?

Yes fixed deposits can be broken before maturity. However in such cases a penalty is applied, and interest is calculated as per the actual duration of fixed deposit. What this means is that if you create a Fixed Deposit today for 3 years at an interest rate of 8% per annum, but you need to break it in 2 years only, then interest rates prevailing for a 2 year fixed deposit would be considered which might be as low as 7% per annum. Also a penalty would be applied. However please not that tax saving fixed deposits are non breakable.

So make sure your needs are well taken care of, before you park the money in fixed deposits.

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