Busting Myths About Fixed Deposits

Myths About Fixed Deposits

Like in the case of any investment product, there are myths surrounding fixed deposits also. When  you use a fixed deposit calculator to zero in on the best FD or when you compare the fixed deposit interest rates, you must also spend a minute browsing through these plethora of myths pertaining to fixed deposits. They will not only help you understand the pros and cons of fixed deposit investments better, but also put you in the right perspective.

Fixed deposit myths come in various forms. There are myths pertaining to the types of fixed deposit instruments and their tax implications. There are questions on whether the interest on FD is taxable. Above all, there are a number of myths surrounding the TDS deduction and the actual tax payable. Here are 6 such myths that would help you to understand the FD product a lot better.

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Busting 6 myths pertaining to fixed deposits

Here are 6 extremely popular and generally accepted myths pertaining to fixed deposits. Read on and get a better perspective of FDs.

1) Myth 1 – I have invested in tax free 5-year FDs, so my interest is tax free. That is a big myth. Remember, the 5-year FD is an exemption on the amount invested and locked in for five years. This is subject to the outer limit of Rs1.50 lakhs under Section 80C. However, even in case of 5-year long term FDs, the interest is fully taxable in your hands and subject to tax at your peak rate of tax.

2) Myth 2 – I have invested in FDs in the name of my wife and children, so the interest is tax-free as they are not tax payers. This is again a myth. When the FD is paid for with your money, the interest will be clubbed with your income for tax purposes, even if it is in the name of your wife or your child. It is different if your wife buys the FD with her own funds. In the case of FD in the name of children, there will just be a basic exemption of Rs1,500 per year per child, available for up to two children.

3) Myth 3 – I am locked into a 2 year FD, so I cannot come out of the FD. That is again a myth in the case of bank FDs. Such lock in restrictions do exist for corporate FDs or NBFC FDs. However, in the case of bank FDs, they can be prematurely withdrawn at any point of time, although there will be a small penalty charge. Better still, you can get a loan up to 85-90% of the value of the bank FD at any point on a real time basis. Hence, you need not worry about being locked into your FD.

4) Myth 4 – I have submitted Form 15G / 15H to the bank, so I do not have any tax liability on FD interest. This is again a myth. Remember that Form 15G and 15H are voluntary declarations that your total income including the FD interest is less than Rs2.50 lakhs. However, should you realize before the end of the year that your total income is crossing Rs2.50 lakhs, you are liable to inform you bank about TDS deduction. Excess tax can be claimed as refund later.

5) Myth 5 – Interest income annually is less than Rs10,000 so there is no tax payable on FD interest. That is again a wrong interpretation. The Rs10,000 interest limit is only in the case of TDS deduction. Whether the bank deducts TDS or not, you are still liable to pay tax on interest earned on FD.

6) Myth 6 – Finally, since banks has deducted TDS, my tax liability is over. That is wrong. Bank just deducts 10% TDS on interest beyond the threshold. However, your tax liability on interest on FD is the peak rate i.e. 20% or 30% as the case may be. You can get credit for TDS deducted.