10 Common Myths Surrounding Fixed Deposits

Rupa and Sima were neighborhood friends, they both wanted to do some investments for financial security and decided to do Fixed Deposits as it was low Risk Big Return investment with maybe low or not taxable interest. At first both of them believed that it was a non taxable or can be hidden from taxman investment which made them more inclined to invest in it. Now Sima hurriedly put in her investment but Rupa enquired more about the Fixed Deposits and then she proceeded with her investments and managed it carefully. Hence, when both of them received their interest Sima followed that She landed in  big trouble with the taxman whereas Rupa received her healthy amount.

Let’s Together Learn About the Myths of Fixed Deposits :

Myth 1 – The IT Department reported about all the Interest accrued against our PAN number by the Bank. Also in such an interconnected world there is no way we can escape the eyes of taxmen. 

Fact 1 – The IT Department reported about all the internet accrued against our PAN number by the Bank. Also in such a world of interconnection there is no way one can escape from the eyes of a taxman.

Myth 2 – After Form 15G/H submission we are not liable for tax.

Fact 2 – Form 15G/H serves the purpose of confirming to the bank that in the current financial year we are not likely to fall in the 10% tax bracket, hence requesting not to deduct TDS. But by the end of the financial year ones got to pay tax as per the tax slab ones fall in.

Myth 3 –I have invested in a 5 year Tax Free FD. It will not be taxed now.

Fact 3 – The name does make it attractive to join in but to its contrast Tax Free FDs are not actually tax free. They don’t save tax on the interest income out of Fixed Deposit. But save tax by showing the principal investment under Section 80C, just like you may save tax by showing EPF or PPF investment under Section 80C. 

Myth 4 – National Savings Certificates (NSC) or Kisan Vikas Patras (KVP) are tax free.

Fact 4 – Again not true at all, every single interest money is taxable as in normal FDs.

Myth 5 – Senior Citizen Deposit Scheme is Tax Free.

Fact 5 – Very Untrue. Every single penny of interest earned  is taxable as for normal FDs.

Myth 6 – I have invested in an FD in my wife’s name. So, I am saved from any taxes.

Fact 6 – Husband investing in Fixed Deposits  in wife’s name will be taxed against the interest as his income.

Myth 7 –  I have invested in my child’s name. So, I am saved from any taxes.

Fact 7 – Father investing in FDs in the name of his child will be taxed against the interest as his income whereas in case of children an exemption of Rs.1,500 per year per child for a maximum of two children is allowed.

Myth 8 –I have a recurring deposit. Interest is not taxable here.

Fact 8 – Absolutely wrong, every single penny of interest earned is taxable.

Myth 9 – Your interest is less than Rs.10,000 in a financial year and thus there is no tax liability.

Fact 9 – Unless one falls in 0% tax slab even 1 rupee earned FDs are taxable. This exemption is only available for interest earned out of saving accounts money which are ideal. 

Myth 10 – Bank has already deducted TDS – so, you don’t need to pay any more tax.

Fact 10 – Banks deduct only 10% of the interest earned as TDS, or 20% if you have not provided the PAN Number to the bank. But you may actually be liable for more as it all depends on your total income in the financial year. If you fall in the 30% tax bracket, then you are liable to pay 30% tax on the interest earned from fixed deposits – after adjusting for 10% or 20% TDS that may already have been deducted by the bank. 

Conclusion: 

Now having a clear understanding of Fixed Deposits and tax liability arising out of the interest income from the same will keep this investment option the way it was designed – simple, guaranteed, liquid, monitoring free and risk free. You will be able to enjoy its true charm then !