Over the last year, our country has witnessed a situation of rising inflation, a turbulent stock market and a decline in the prices of bonds. The Reserve Bank of India has been responsible for hiking the rates of interest and a further hike in rates, in the near future, cannot be ruled out. All this has nonetheless, spelt bad news for corporate houses, especially since all their earnings can plummet with such a steep rise in interest rates. However, higher interest rates are not completely detrimental to the health of the market as they are sure to benefit fixed income instruments like bank fixed deposits. Higher the rate of inflation in the country, higher will be the interest offered on such bank deposits, leading to profitability for investors with double-digit interest rates. Banks have already begun to raise their interest rates on all their deposits and advances.
In such a scenario, one must take advantage of the attractive interest rates up on offer, by beginning to shift their loyalties towards bank fixed deposits. On the other hand, younger individuals must seek to invest in long-term instruments like equity funds or Systematic Investment Plans, simply because the overall shape of the economy on a long-term scale continues to be steady. It is not always that investors in this sector are always pushed to the extents of opting for personal loans, home loans etc to finance their requirements. Fluctuations in the equity market are all bound to be erased after a certain period of time. Remember to make diversification your motto while investing in funds. Professionals who are middle-aged or are expected to retire soon must utilize the viability of bank fixed deposits and other debt instruments such as corporate debentures and bonds, simply because they are on the lookout for a regular and steady source of monthly income. If you particularly belong to the lower income tax group, where your taxable income stands at less than Rs. 5 lakh invest a big share of your funds in debt instruments like bank fixed deposits and corporate bonds and debentures.
Before you invest your funds in a fixed deposit, conduct extensive research on the interest rates offered by various banks. After conducting a comparative analysis on which banks offer a desirable interest rate, look for a tenure that best suits your needs. For instance, in some fixed deposits, you need to deposit your money for a period of 5 years while in some banks the tenure may be for 10 years. There can also be a lot of variation in the interest rates offered by different banks for different tenures or periods of deposits. The method of calculating the rate of interest can vary as some banks may calculate the rate of interest on a quarterly basis, half-yearly, annual or on the entire period of maturity. In order to avail the maximum benefits with fixed deposits, it is best to split your investments. This is usually done to avoid the tax deductable as source or TDS. If your interest exceeds Rs. 10,000 annually, then TDS of 10% is applicable on your fixed deposit. In order to avoid and skip such a tax liability, it is best to split your investments in fixed deposits. You need to open fixed deposits in the different branches of the same bank, thereby limiting your interest earned, which should ideally be shown as less than Rs. 10,000 in one single branch. You could do the same exercise by opening fixed deposits in different banks as well. Your TDS is skipped as it is a tax liability that is charged in one branch of a bank and so on. Also, in case of a contingency or financial emergency, where you need to withdraw funds from your fixed deposit, by splitting your fixed deposits, you do not hamper the entire purpose.
The interest that is gained from your fixed deposit can either be withdrawn or you can choose to reinvest it in the same scheme. If you would like to withdraw your interest amount, then it will be credited directly to your savings account that has been mentioned by you on its receipt. However, if you choose to invest such an interest, then you will have the added advantage of earning interest which will always be higher than the previous year’s rate of interest. On withdrawal of interest, you will be subject to the same rate of interest as last year. You can also opt to invest your funds in tax saver fixed deposits. As the name suggests, apart from the benefit of assured returns, you will be exempted from taxes under Section 80C of the Income Tax Act 1961. Although you will be subject to TDS, you will be able to generate more returns than you would ever make with a regular fixed deposit, due to exemption of taxes.