Rising interest rates make fixed deposits attractive again

Fixed deposits are easy to open and close as well. Liquidity is not an issue and they can be withdrawn any time before the maturity

Hyderabad: For many, fixed deposit still constitutes a safe investment channel. It cuts out the risks and pays at an assured rate of interest. Senior citizens and women are given preferential interest rates. These are not linked to market risks.

The key advantages – the fixed deposits are easy to open and close as well. Liquidity is not an issue and they can be withdrawn any time before the maturity. However, if they are withdrawn before the agreed tenure, the bank offers one per cent less interest from the earlier rate.

“Most banks now offer interest rates of 7% or more on fixed deposits. Sometimes these rates are on special tenures of around two years. Interest rates are beginning to peak so it makes sense for depositors to lock into these rising rates for better returns for the near future,’ said Adhil Shetty, CEO of startup BankBazaar.com

However, the interest earned is taxable. The interest earned is added to the total income and is tax as per the tax slab.

As per the Income Tax Act, 1961, the interest earned on fixed deposits is added to the ‘income from other sources’ and is fully taxable as per the applicable income tax slab. For instance, interest rate on the fixed deposit might be 6% but the post-tax rate would work out to 4.2% if the deposit holders are in the 30% income tax slab. It will help to calculate the returns after taxation.

In the event the bank was to fail, depositors have the insurance cover offered by the Deposit Insurance and Credit Guarantee Corporation (DICGC). The maximum cover offered is Rs five lakh as savings, current account, FD or recurring deposit will be clubbed.

If the deposit is Rs five lakh, only this amount is recoverable. In such cases, the interest component offered by the bank is not covered. If both principal and interest amount less than Rs five lakh, both will be recovered under the insurance. Accounts opened in a different capacity- like a guardian, joint account with spouse, parents- will be seen as separate accounts and they will be eligible for the insurance cover separately.