TIPS FOR INVESTING IN FIXED DEPOSITS
Many of us think that fixed deposit is safest form of investment, but here are few things that should be considered while investing in fixed deposits:
1. FIXED DEPOSITS ARE NOT ENTIRELY SAFE: You must split your amount of investment and invest in different banks as fixed deposits. This will safeguard your money, an added advantage is that if you need the amount in case of an emergency, you won’t have to break the entire deposit.
2. LADDER YOUR INVESTMENTS: Fixed Deposits are prone to uncertainty because interest rates move in multi year cycles. To avoid such uncertainity build a ladder of fixed deposits which have different tenures. For example if you have one lakh rupees, split them in four deposits of Rs 25,000 each and invest them for one, two, three and four years. By doing so, highs and lows in interest rates will balance out over a period of time. This will also ensure liquidity because you will have one deposit maturing every year.
3. PREMATURE WITHDRAWALS INVITE A PENALTY: You should get the tenure right while investing in a fixed deposit. Locking up money for the long term and then making a premature withdrawal means lower returns.
4. TDS IS ONLY AN INTERIM TAX: The interest earned on your FD is fully taxable. If interest amount exceeds Rs 10,000 in a year, bank will deduct 10.3% tax at source before you get the amount..If you are in higher income bracket i.e. annual income over Rs 5 lakhs, you will have to pay more tax on this income.
5. FIXED DEPOSIT INCOME WILL BE CLUBBED WITH YOURS: If you invest in the name of your spouse or children then also you can’t avoid tax. If a husband invests in fixed deposits in the name of his wife, the interest earned will be treated as his income.