FD interest rates have been below the 7 % mark till quite some time now. A small appreciation was seen with SBI hiking the maximum FD interest rate to 6.9% just recently and other banks are expected to follow soon.
While FDs are a good means to safely park your money they can be hardly considered as wealth builders in present times of low interest rates. The FD interest rates are not much higher than the savings bank interest rate of 4% for most banks though few private sector banks are offering higher rates.
Savings and Fixed Deposit Accounts
Fixed deposit accounts are linked to savings bank account and are also called term deposits. Money can be transferred almost instantly from the linked savings bank accounts to the fixed deposit accounts and vice versa. Fixed deposits of authorized banks are as safe as savings deposit and no matter how much interest rates on FDs fluctuate it can never go below the RBI mandated savings account interest rate of 4%. Fixed deposits can be liquefied immediately and money can be transferred to savings account. If fixed deposits are liquefied before the tenure the banks cuts 1 % from the returns accrued at the applicable FD interest rate for the particular FD.
Interest on FDs can be cumulated further and clubbed with the principal to benefit from compounding. Alternatively account holders can choose to get the interest amount credited to their savings account monthly, quarterly or yearly.
You can put your money in FD if you feel that your money will be lying idle in the savings account for some time. Banks are offering fixed deposit schemes with tenure ranging from 7 days to ten years.
Why do FD Interest Rates Change?
Though RBI mandates that savings accounts interest cannot be less than 4%, banks can lower and raise the fixed deposit interest rates when RBI lowers or raises its lending rates to banks also called repo rates. RBI changes its interest rates to control the supply of money in the economy. When the repo is increased by RBI banks decrease their borrowing rate that is rate at which they borrow from customers. Banks usually prefer not to increase their lending rates as that would decrease the demand for their loan products, yet certain times banks may increase the lending rates also so as to offset increase in RBI rates.
Currently the FD interest rates are 5.75 % to 6.9%. Fixed deposits with one year tenure are having maximum interest rates.
Tax Rates on Fixed Deposit Returns
The already low FD interest rates are further lowered when the applicable tax rates are applied to FD returns. The banks deduct a tax of 10 % on FD returns if the returns are above Rs 10 K for a financial year. However if returns from all FDs held in all the banks are less than Rs 2 lakh in a financial year then by submitting form 15G/H for the FD account the tax deducted at source amount can be saved .Individuals with above Rs 2 lakh returns from FDs in a financial year need to pay tax deductible at source as per the requisite tax slab rates which ranges from 10% to 30 %.
How to Offset the Falling FD Interest Rates?
With so little interest and so much taxation FDs hardly remain an attractive investment option. Hence after ensuring suitable liquidity it is advisable to invest in long term schemes. Though long term schemes have higher lock in periods but interest rates are higher and investors can easily earn above 8 to 9 % interests on their deposits and with a small quantum of alacrity can even easily secure double digit returns. What are the lucrative investment options available to investors on the present day? Let us consider the major ones singularly:
- Tax Saving Fixed Deposit Schemes: These may have lock in periods of five years but can offer higher interest rates and security as well as savings on taxes.
- PF, PPF, Pension Schemes and Other Savings Schemes: These are tax exempt corpus building schemes with long tenure and lock in periods. Long term savings schemes offer returns over 8 to 9% and high security and minimum investment criteria is just Rs 6 K p.a. These are ideal for building up retirement corpus or corpus for important life events like child education and marriage over the employed life time.
- Equity Linked Savings Schemes: Also called ELSS these are mutual fund equity portfolios. ELSS offer higher returns in double digits with varying security options as well as tax savings. ELSS in comparison to the long term savings schemes have low lock in period of three years.
- Mutual Fund Schemes and SIPs: MFs are managed fund portfolios comprising of equity, debt, bonds and government securities. SIPs are MF schemes offering high flexibility of investment. At present most top ranking MFs are offering double digit returns as well as tax benefits.
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