What are Fixed Deposits?
Fixed Deposits or FD is a financial scheme provided by financial institutions such as banks which offer higher rate of interest for the money deposited by the individual for a specified time period. The money deposited is known as the principal. The time period is known as the maturity period.
How does it work?
The purpose of FD is to offer better rate of interest on your money than the savings account. Savings account normally offers interest up to 5 % (Kotak Mahindra Bank offers 6% interest).
The maturity period of FD is from a minimum 7 days up to a maximum of 10 years. The rate of interest offered varies from 7% to 11%. This depends upon factors such as principal paid, maturity period opted, age and the institution that offers it. Senior citizens get a higher rate of interest compared to the normal individuals. The matured amount is the interest acquired for the principal along with the principal.
What happens once my FD’s are matured?
On completion of the maturity period, the matured amount is either withdrawn by the individual or renewed.
Upon withdrawal, the matured amount is returned to the FD holder by cash if the amount does not exceed Rs 20,000. For amounts exceeding Rs 20,000 the amount is returned through cheque or deposited to the savings account mentioned by the holder. Upon renewal, the matured amount would be treated as the new principal with the interest rates compounded.
What options could be excised by FD holder?
Loans up to 70-90 % of the principal deposited could be availed. The rate of interest charged would between 2 – 2.5% more than the rate of interest offered by FD.
Partial withdrawal of the money deposited could be done on FD holder’s request before the arrival of maturity date. This is accompanied with a penalty around 1%. The remaining amount earns the original rate of interest.
A holder could prematurely close the FD by making a premature withdrawal. The rate of interest mentioned while opting for the FD is given along with the principal paid. This is accompanied with a penalty of 0.5 – 1%.
Are FD’s tax exempted?
Interest acquired through FD’s are taxable under “Income from other sources”. If interest acquired is above Rs 10,000 it incurs a 10% TDS (Tax deducted at source). If not deducted as TDS, then tax is incurred as per your Income tax slab.
As per 206AA section of Income Tax act, it is mandatory for each individual whose FD’s acquires interest exceeding Rs 10,000 to furnish his PAN (Permanent Account Number). Failing to furnish the PAN will incur a 20% tax.
In case of no taxable incomes, FD holders could submit Form 15G whereby taxes are exempted or reduced to lower rates. Similarly Senior citizens should submit Form 15H for exemption of taxes. Both the form would request furnishing of the holder’s PAN (Permanent Account Number). If you don’t own a PAN card the same could be communicated using FORM 60 application.
Please Note: The numbers mentioned for rate of interest, days and taxes are with respect to India. It may vary with other countries.