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Earning more from fixed deposits

Jameslincoln 11 Stories

Wednesday July 12, 2017 , 3 min Read

Bank FDs can be considered pretty safe as you know the return that you will receive when they mature. The fd interest rates are also these deposits. However, there are disadvantages of bank fixed deposits too. High inflation and taxable interest are some of the major disadvantages. Thus, it is important for you to know about the ways that can help you to maximum the fixed deposit returns.

In case the bank deducts TDS on a semi-annual basis or quarterly basis, the interest earned will be lesser against the TDS deducted on a yearly basis. This happens as in a fixed deposit, where the interest is given on cumulative basis, every single time interest is added to principal amount, bank is liable to pay an interest on higher amount. Thus, principal will get depleted if the tax deductions are carried out by the bank in every quarter. In case the tax is deducted by the bank at the end of the FY, depositor will be earning interest on higher balance in deposit.

TDS on the fixed deposits are deducted by banks at 10% in case the interest is more than Rs.10,000 in one particular financial year. There is no rule on when the bank should deduct the TDS. Different banks come up with their own procedures. Some deduct annually, some deduct half-yearly and some deduct quarterly. Because of this, effective interest earned on deposit amount also differs. As per the Central Board of Direct Taxes, tax is deducted at source upon interest accrual at the end of the FY or at a periodic interval that is in line with practice of bank or payee/depositor’s requirement or on encashment or maturity of the time deposits. So, there’s room for interpretation by the banks and hence, there is discrepancy.

IIT Bombay’s Ashish Das published a tech report on this and said the uniformity in TDS deduction by banks will offer help to the customers pick a bank where they intend to invest. For a fixed deposit account that was opened on May 10 for a particular year, earning interest rate of 10%, TDS is applied on March 31, the yearly yield, TDS works out to 9.334%. In cases where the TDS has been applied two times in one year (September 20 and March 31, the earn works out to 9.316%. If TDS is applied at every quarter, the earn works out to 9.307%.

Let is consider that Rs.1 lakh has been invested by you. In case the bank makes TDS deductions in each quarter, the interest yield at year end is Rs.9,307. The TDS in this case stands at Rs.1,034. So, upon maturity, the amount paid is Rs.1,09,307. In case, deductions of TDS are made by the bank in the months of September and March, interest yield is Rs.9,316 and the TDS stands at Rs.1,035. Thus, the net sum upon maturity is Rs.1,09,316. If the bank makes the TDS deductions only in March and TDS is Rs.1,037 and the interest yield is Rs.9,334. Thus, the net amount stands at Rs.1,09,334. The ideal thing to do is, check with your bank about TDS deduction process before you get locked-in an FD.