In comparison to investments and effective spending, the investment seems the better option as you can earn profit from the investment, and in some cases, your money might get doubled in a matter of time. You need to have a sound knowledge of the market and its fluctuations before investing. Blindly made investments may make you lose your hard earned money. So, if you are new to the investment field, you need to make sure that your investment source is risk averse, or else you can take the help of secured investments like FD and debt funds.
It is not easy to resist the feeling of discontent when our money is taken away from us. We question the authority for the deduction, and it seemed unfair, we tend to ask for a refund. While fixed deposits are considered to be safer than debt funds because there are factors like taxes which can affect your returns. The income that you earn from fixed deposits are considered as taxable income, hence, you can be charged with tax if your income exceeds the limit of tax exemption.
In order to avoid tax deductions on your FD, you need to understand how taxation on FDs is calculated. When you deposit your money in a fixed deposit account, the lender gives you the returns either annually or at the end of the tenure. When you get money from the lenders, you might notice that the returns that you have got are less than what you had expected. This happens due to the tax levied on your returns.
For instance, if you have deposited INR 2 Lakhs in your FD account at the interest rate of 9 percent per annum for a period of 10 years. Now, if you decide to take returns annually according to the rate of interest and the amount deposited, you will earn INR 18, 000 annually. According to the Reserve Bank of India (RBI) regulations, any fixed deposit amount that crosses the limit of INR 10, 000 has to be taxed with Tax Deducted at Source (TDS). So, your earning of INR 18, 000 will be taxed with TDS and you might get lesser than what you had expected.
In a high-interest rate scenario, if you fall in the lower taxation bracket, the returns you might be earning can be impressive, but as your income goes higher the rate of taxation also rises. For example, if you have invested INR 2 lakhs as fixed deposit and the tax percentage is 10 percent, the interest on the earning of INR 18, 000 annually will be deducted with 10 percent of the amount of tax and instead of earning 9 percent interest on the amount, you will only gain 8.07 percent worth of earning.
Similarly, if you renew your fixed deposit with the same lender, the lender might increase the interest rate by 1 or 2 percent, which will increase the interest amount for returns and simultaneously, increase the tax rate on the return, which means if you fall in the higher taxation slab, your income will reduce even more as the high rate of tax will be deducted.
While investing, you have to make sure that you check the interest on fixed deposits because a high-interest rate can be attractive but can also attract a high taxation on FD returns. To avoid such a taxation, you can use the FD calculator and get an estimate of deduction which can be accrued. You can also get your tax exempted by filing 15G or 15H form.