Growing Your Savings: 7 Myths Regarding Fixed Deposits That Are Still Circulating Around Today

As global economic instability sends ripples of volatility crashing through markets, sending interest rates upwards and previously safe investments infested with risk, investors are increasingly turning to fixed deposits (FDs) to offset their investment risks.

These traditional and safe mechanisms are making a comeback in the global investment landscape. The concept is simple; investors place a fixed amount in an FD for a set period of time and accrue a fixed amount of interest. You can find information on flexible tenures and current interest rates by using an FD calculator.

Here we take a look at some of the myths and misconceptions about FDs and provide up-to-date information on their advantages, disadvantages and tax status.

Myth 1: You can only find FDs at banks

This is not the case. Many companies are able to offer FDs for retail investors. Companies will often offer a higher interest rate for investors. However, it is worth noting that unlike banks, companies are not insured. This means if the company goes bankrupt, it may be more challenging to recover your funds than it would be from a financial institution.

Myth 2: The bank pays tax on FD interest

Not always. Most banks pay a 10% rate on your interest payments. If your earnings put you in a higher tax bracket, you will be expected to declare your interest earnings and make the relevant payments to the taxman.

Myth 3: Regular interest payment generate more money than cumulative interest payments

This is not true either. Most FDs offer the option of either receiving interest payments at regular intervals, or in one lump sum once the FD matures (cumulative). The cumulative rate pays out on the whole amount in the FD (the principal and the interest) and therefore means your interest is compounded, yielding higher returns on your investment.

Myth 4: You don’t have to pay tax on 5-year tenures

This is not correct. Some FDs offer a five-year tax benefit, but these are advertised as such and only offer exemptions of up to Rs 1 lakh.

Myth 5: I don’t need to declare my interest

Again, this is not true. You will need to declare any earnings from your FD on your income tax form under the ‘income from other sources’ section. Failure to do so could land you in legal trouble.

Myth 6: If I need money halfway through my tenure, I will have to withdraw it early

This depends largely on the specific FD you have invested in. There are mechanisms available that allow you to withdraw some of the investment amount early on some FDs. For example, some FDs offer Flexi-deposits. These automatically deposit excess funds from a savings account into an FD. Many banks allow customers to withdraw from these excess funds as they would a savings account, provided they do not touch the principal FD amount.

Myth 7: FDs do not offer overdraft capabilities

This also depends on the specific FD. Some actual offer overdraft facilities of up to 80 or 90 percent of the FD amount.

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