A bank fixed deposit or FD can be defined as an investment in which the investor invests his or her hard earned money for a fixed lock-in period with a bank to get a fixed rate of interest. Bank fixed deposit can be used as a tax saving tool as well as a good investment measure for higher return.
Investment benefits of bank fixed deposit
Interest on fixed deposit
Investing in bank FD will give you interest. This interest will either be based on fixed or floating rate of interest.
If you have selected fixed rate of interest then the rate will not affected based on the changes to market rate. Whereas, in case of floating rate of interest, the interest rate keep changing based on the market rate during the fixed deposit term.
Interest income on bank FD will get accumulated to the original deposit while paying the accumulate amount to the customer. This type of fixed deposit it called reinvestment scheme where you get the whole amount at the end of the term i.e. interest plus principal amount.
You also have option to get interest as a periodic payout in either monthly or quarterly payments to your saving account. This is called traditional scheme. Many investors use this method as a periodic source of their regular income.
Interest rates use to differ from bank to bank. For high interest rate you need to check all banks rates before selecting. Senior citizens are eligible for higher interest rate.
Loan Facility on Fixed deposit
Many banks are accepting FD as a collateral security for loan. You can negotiate with your bank to get almost 90% of your fixed deposit as loan.
You can also negotiate with the bank to get loan at a low rate as fixed deposit serves as a best collateral security for issuing loan.
Bank FD has also some other investment benefits like low risk (almost negligible), assured rate of return, capital appreciation and flexibility of regular periodic income.
Tax deduction on fixed deposit
Section 80C of income tax act deals with tax deduction on fixed deposit. To know the tax deduction or benefits of bank FD you are first required to know different type of bank FD and on which type of FD this tax deduction under section 80C is available.
To understand the tax deduction better, we will break the type of fixed deposit into two categories. First category of fixed deposit which is allowed as a tax deduction is 5 years fixed deposit. All other fixed deposit with less than 5 years tenure will fall into the second category and are not allowed as tax deduction.
5 years fixed deposit means the individual who has invested in fixed deposit will have a lock in period of 5 years or more.
If you have invested in 5 years fixed deposit during the financial year then the amount so invested will be eligible for tax deduction under section 80C.
You can claim tax deduction while filling your income tax return. If you are an employee then submit proof of 5 years fixed deposit to your employer for considering it as tax deduction investment under section 80C of income tax act.
Please remember that the amount invested will be allowed as tax deduction. Interest earned on fixed deposit will not be allowed as tax deduction or exemption. It will be taxable as your income from other sources and based on the tax rate applicable to you. Bank will also be deducting TDS on interest on fixed deposit.
Tax on interest on fixed deposit is the only criteria which makes fixed deposit as not a good investment option if you are looking for high return option. For higher return we suggest you to go for public provident fund if you can keep investing for a lock in period of 15 years.
Also read: How to invest in Public Provident Fund scheme