Fixed Deposits (FDs) have long been a favored investment choice among Indian citizens due to their assured returns and safety. The Reserve Bank of India (RBI) periodically updates regulations concerning FDs, especially regarding Tax Deducted at Source (TDS) and premature withdrawals. Recent amendments have introduced significant changes that depositors should be aware of to maximize their benefits.
Understanding TDS on Fixed Deposits
Interest earned from FDs is subject to TDS under Section 194A of the Income Tax Act, 1961. As of the latest regulations, if the total interest from all FDs in a bank exceeds ₹40,000 annually (₹50,000 for senior citizens), the bank is mandated to deduct TDS at 10%. However, if a depositor fails to provide their Permanent Account Number (PAN) to the bank, the TDS rate escalates to 20%. To prevent TDS deduction, individuals whose total income is below the taxable limit can submit Form 15G (for those below 60 years) or Form 15H (for senior citizens) at the beginning of the financial year. This declaration ensures that no TDS is deducted, provided the individual’s tax liability is nil.
Types of Fixed Deposits
Banks and Non-Banking Financial Companies (NBFCs) offer various FD schemes tailored to different investor needs. Understanding these can help depositors choose the most suitable option:
- Standard Fixed Deposits: These are traditional FDs with tenures ranging from 7 days to 10 years, offering fixed interest rates higher than regular savings accounts.
- Tax-Saving Fixed Deposits: Designed for Resident Individuals and Hindu Undivided Families, these FDs have a lock-in period of 5 years and allow depositors to claim tax deductions up to ₹1.5 lakh under Section 80C of the Income Tax Act.
- Floating Rate Fixed Deposits: In these FDs, the interest rate varies based on a reference rate, such as the RBI’s Repo Rate, allowing returns to adjust with market fluctuations.
- Flexi Fixed Deposits: Combining the features of savings accounts and FDs, these allow depositors to withdraw funds as needed while earning higher interest rates on the remaining balance.
- Senior Citizen Fixed Deposits: Exclusive to individuals aged 60 and above, these FDs offer an additional interest rate, typically 0.50% higher than standard rates.
- Corporate Fixed Deposits: Offered by Housing Finance Companies and NBFCs, these FDs usually provide higher interest rates than bank FDs but come with higher risk.
- Cumulative and Non-Cumulative Fixed Deposits: In cumulative FDs, interest is compounded and paid at maturity, while in non-cumulative FDs, interest is paid out at regular intervals (monthly, quarterly, etc.).
- NRE and NRO Deposits: Non-Resident External (NRE) FDs are tax-free and fully repatriable, meant for NRIs to park their foreign earnings in Indian Rupees. Non-Resident Ordinary (NRO) FDs are for NRIs to deposit their income earned in India and are subject to TDS.
- FCNR and RFC Deposits: Foreign Currency Non-Resident (FCNR) FDs allow NRIs to maintain deposits in foreign currencies, protecting against exchange rate fluctuations. Resident Foreign Currency (RFC) FDs are for returning NRIs to park their foreign currency earnings.
- Callable and Non-Callable Fixed Deposits: Callable FDs permit premature withdrawals, usually with a penalty, while non-callable FDs do not allow premature withdrawals but offer higher interest rates.
Recent RBI Amendments on Premature Withdrawals
The RBI has recently revised rules concerning premature withdrawals of FDs. Previously, depositors could prematurely withdraw amounts up to ₹15 lakh. The new regulation has increased this limit to ₹1 crore, allowing premature withdrawals for term deposits of ₹1 crore or more. This change applies to both Non-Resident External (NRE) and Non-Resident Ordinary (NRO) deposits across all commercial and cooperative banks. However, for NRE and NRO deposits, premature withdrawals are permitted only if the deposit amount is less than ₹1 crore.
Key Differences Between Callable and Non-Callable Fixed Deposits
Understanding the distinction between callable and non-callable FDs is crucial for investors:
| Feature | Callable FDs | Non-Callable FDs |
|---|---|---|
| Premature Withdrawal | Allowed, usually with a penalty | Not allowed |
| Interest Rates | Generally lower due to the flexibility of withdrawal | Higher, compensating for the lack of liquidity |
| Liquidity | Offers liquidity as funds can be accessed before maturity | Funds are locked in until maturity, reducing liquidity |
| Suitability | Ideal for investors who may need access to funds before maturity | Suitable for investors seeking higher returns and who can commit funds long-term |
Also Read: All New Rajdoot 350 Bike Will Be Launched Soon, Check The Price And Features
Frequently Asked Questions (FAQs)
Q1: What is the current TDS threshold for fixed deposit interest?
A1: As per the latest regulations, TDS is deducted if the total interest from all FDs in a bank exceeds ₹40,000 annually for individuals and ₹50,000 for senior citizens.
Q2: How can I avoid TDS deduction on my FD interest?
A2: If your total income is below the taxable limit, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) to your bank at the beginning of the financial year to prevent TDS deduction.
Q3: What are the recent changes in RBI regulations regarding premature withdrawals of FDs?
A3: The RBI has increased the limit for premature withdrawals from ₹15 lakh to ₹1 crore, allowing depositors to withdraw term deposits of ₹1 crore or more before maturity.
Q4: What is the difference between callable and non-callable fixed deposits?
Click here to learn more.
Akesh is a furniture expert with years of experience in design and craftsmanship. Specializing in sustainable materials, he shares his expertise to help people create stylish and functional living spaces.