Fixed Deposit : People often invest in FD to secure their future. This is a way in which your money is safe, but do you know that only up to Rs 5 lakh is safe in case of bank default? Let us know about some important aspects related to FD.
Security up to Rs 5 lakh
While investing in an Fixed Deposit, it is important that you know what the limit of protection of your investment is. The protection provided by DICGC (Deposit Insurance and Credit Guarantee Corporation) is only up to Rs 5 lakh. This means that if the bank defaults, you will get insurance of only up to Rs 5 lakh. This guarantee is not only for FD but also applies to savings accounts, current accounts, FDs, RDs, and deposits of any other bank scheme. If you have deposited more than this amount in the bank, then that amount may be lost.
Penalty on premature withdrawal
If you have invested in an FD and you have to break it before time, then you may have to face a premature penalty. This penalty can be from 0.5% to 1%, which can vary according to the bank. If you have invested in a tax-saving Fixed Deposit, then you can withdraw it even before the period of 5 years, but in this case you will not get a tax exemption.
Tax on interest on FD
The government levies tax on the interest received on FDs. When you file your ITR (Income Tax Return), the interest received on FD is counted as your income. This means that the burden of additional tax increases is on you.
Nowadays there are many such schemes that give better interest than FD, and you also get tax exemption on them. Therefore, if you want to save tax, then you also need to look at these options.
Same interest rate
The interest rate on FD remains the same throughout the tenure. This means that once you make an Fixed Deposit, you will get the same interest for the entire tenure, irrespective of any change in the interest rate by the banks.
If the banks increase the interest rates in the meantime, you will not get the benefit. Apart from this, tax has to be paid on the interest, which can cause further loss. From this it is clear that you should make a careful decision while investing in FD for the long term.
Better investment options than FD
In today’s time, the interest rate on FD is not very high. Most banks offer interest ranging from 6% to 8%, and some banks offer interest up to 9%. However, these interest rates are not high, and you should consider it according to your needs.
But if you want better interest, then mutual funds can be a great option. Although mutual funds have market risk, if you invest in them through SIP (Systematic Investment Plan), this risk can be reduced. Investing in mutual funds can give returns of 15% to 20%, which is much higher than Fixed Deposit.
Conclusion
FD is a safe and stable investment option, but it also has some disadvantages, such as a flat interest rate and a penalty on premature withdrawal. Apart from this, there are also aspects like tax and protection up to Rs 5 lakh, which you need to understand. If you want better returns and want to avoid tax, then mutual funds can be a great option.
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