Investing in fixed deposits is traditionally accepted as a favored investment option among Indians. Even though fixed deposits give you a stable and fixed return, there are so many drawbacks because of which many financial advisers suggest not to invest in it. Let us look into these benefits and drawbacks one by one.
Drawbacks of Investing in Fixed Deposits
Interest rates of fixed deposit
Interest rate of your fixed deposit is traditionally fixed during the entire tenure of the deposit. But, when market interest rate goes up, you will not be getting higher interest rate based on this movement.
Another problem is inflation. If inflation of our country goes up then you actually end up getting less amount compare to the purchase power on the date of maturity.
Tax on Income of Fixed Deposits
Interest is the only income that you get from your fixed deposit. Such interest amount is not tax free as per the income tax law of our country. If your interest on fixed deposit is more than 10000 rupees then bank has to compulsorily deduct TDS from it. However, you also have option of submitting for 15G or 15H if you are not taxable.
Penalty for early withdrawal
The major drawback of investing in fixed deposit is penalty for early withdrawals. If you have decided to withdraw your invested amount from fixed deposit before maturity then penalty will be levied based on the time of withdrawal. Such penalty is called premature penalty and differ from bank to bank.
Benefits of Investing in Fixed Deposit
Investing in fixed deposit has also some benefits like the risk of not losing money. Investor who wants to take advantage of this are advised to invest in fixed deposit for a short duration so that after its maturity they can again renew it for another short time based on the market conditions.
Especially employees who want to invest their hard earned money in a secure deposit scheme to get a better investment return at the time of retirement can invest in it.
Another best part of investing in fixed deposit scheme is that you can take loan by keeping it as security. Banks prefer fixed deposit as the best way to sanction loans. If you have fixed deposit then bank can lend you 80%-90% of the principal amount of the deposit as loan. Additional security along with fixed deposit will also enhance your eligibility.
If you can invest for a longer term and blocking it for 15 years is not an issue then we suggest you to invest in public provident fund instead of investing in fixed deposit. Investment to public provident fund can be claimed as income tax deduction u/s 80C of income tax act and at the same time interest income from this fund is also tax free.