A fixed deposit is an investment option that provides a higher interest rate for keeping your funds blocked for a particular period of time. Fixed deposit schemes are available for as low as 7 days to 7 years, in varying periods of time. Depending upon your fund requirements, you can open multiple fixed deposits that mature at different points of time, and provide you funds with interest.
The amount put in a fixed deposit account is locked in till the time the fixed deposit matures. This means, unlike a savings account where money can be withdrawn at any period of time, the amount that you invest in a fixed deposit is locked in and cannot be accessed till the time it matures. It is possible to break the fixed deposit in case of emergency, but most banks charge a penalty for doing that.
A fixed deposit is crucial because it not only earns interest income but also saves money for the person opening a fixed deposit account.
Here are 3 ways fixed deposits can help you save money:
1. It can be opened for amounts as low as Rs. 1,000:
Fixed deposits command a higher interest rate than savings accounts. This makes it beneficial to park funds in them, even if the amount is low. Since fixed deposits can be opened for amounts as low as Rs. 1,000, you can park funds in multiple fixed deposits of short durations, to earn extra income. Opening a fixed deposit will also help you save money and earn interest income on it, as compared to spending it on discretionary items.
2. Tax deductions:
Investment in certain tax saving fixed deposits gets a deduction under Section 80C of the Income Tax Act. Many banks have tax saver fixed deposit schemes. If you invest in these schemes, you can get a deduction in Income Tax up to Rs. 1.5 lakhs.
Depending on your investment in other tax saving instruments, such as life insurance, Public Provident Fund, National Savings Certificate, you can invest a suitable amount in tax saving fixed deposits.
3. TDS is deducted only if interest is above Rs. 10,000:
Banks deduct TDS on your fixed deposit account if the yearly interest crosses Rs. 10,000. Till the time this limit is reached, no TDS is deducted. You can open a small fixed deposit and earn interest on it without having tax deducted. However, the interest earned on fixed deposits has to be considered in the total income at the end of the year. That means you have to pay tax on fixed deposit interest income. The only benefit is no tax will be deducted on it in advance.