5 Common Myths About Fixed Deposits One Should Know

Fixed deposits have long been a trusted investment avenue for Indians looking to grow their savings securely. However, over time, several myths about FDs have taken root. This causes confusion and prevents people from making the most of this reliable financial tool. In this article, we’ll bust five of the most common fixed deposit myths and help you understand the facts. With this, you can confidently include FDs in your investment portfolio. We’ll explore the truth about FD interest rates, tax benefits, investment amounts, withdrawal options, and more.

Myth 1: Fixed Deposits Offer Low Returns

Many believe that fixed deposits provide meagre returns compared to other investment options. However, this isn’t entirely true. While FD interest rates may not match the potential of high-risk investments like stocks, they offer assured returns and stability. For example, Airtel Finance’s fixed deposit plans come with competitive interest rates of up to 9.1% p.a. This can help your savings grow steadily over time.

Let’s say you invest ₹5 lakh in a fixed deposit with an interest rate of 9.1% p.a. for 5 years. Using an FD interest calculator, you’ll find that your investment will grow to approximately ₹7.72 lakh at maturity. That’s a return of over ₹2.72 lakh on your principal amount – a significant gain for a risk-free investment.

Myth 2: All Fixed Deposits Have the Same Tax Benefits

Contrary to popular belief, not all fixed deposits come with identical tax benefits. The interest earned on regular FDs is taxable as per your income tax slab. Meanwhile, certain types of FDs, like tax-saving fixed deposits, offer tax deductions under Section 80C of the Income Tax Act. Invest up to ₹1.5 lakh in a tax-saving FD with a lock-in period of 5 years. Then, you can reduce your taxable income and save on taxes.

However, keep in mind that the interest earned on tax-saving FDs is still taxable. To avoid TDS (Tax Deducted at Source) on your FD interest, you can submit Form 15G or 15H. This is applicable if your total income is below the taxable limit.

Myth 3: Fixed Deposits Require a Large Initial Investment

Another common misconception is that you need a substantial sum to open a fixed deposit. In reality, most banks and financial institutions allow you to start an FD with a relatively small amount. For instance, with Airtel Finance, you can open an FD with as little as ₹1,000. This makes fixed deposits accessible to a wide range of investors, regardless of their financial standing.

As mentioned above, even modest investments can yield decent returns over time, thanks to the power of compounding interest.

Myth 4: Breaking a Fixed Deposit is the Only Option in Emergencies

Many people hesitate to invest in fixed deposits. Why? They believe that in case of an emergency, they’ll have to withdraw their FD, losing out on interest earnings prematurely. While breaking an FD is indeed an option, it’s not the only one.

Pledging your FD as collateral can avail of a loan of up to 75-90% of your deposit amount. It can be done without having to close your FD prematurely. This way, your investment continues to earn interest while you get access to funds for your urgent needs. The interest rate on a loan against FD is usually 1-2% higher than the FD rate. It is still lower than most other loan options.

Myth 5: Investing in a Family Member’s Name Helps Save Taxes

Some people believe that investing in a fixed deposit in the name of a family member can help save taxes. However, this is not entirely accurate. Suppose you gift money to a family member, and they invest it in an FD. Then, as per income tax rules, the interest earned on that deposit will be clubbed with your income. It will then be taxed accordingly.

The only exception to this rule is if the FD is opened in the name of your spouse. Furthermore, they have no other source of income. In such cases, you can claim a tax deduction on the interest earned, up to ₹10,000 per annum. This can be done under Section 80TTA of the Income Tax Act.

Conclusion

Fixed deposits are a safe and reliable investment option that can help you grow your savings steadily over time. By understanding the facts behind common FD myths, make informed decisions and harness the true potential of this investment tool. Are you looking to save for your child’s education, plan for retirement, or create an emergency fund? If so, fixed deposits can be a valuable addition to your investment portfolio.

To get started with your investment journey, explore Airtel Finance’s fixed deposit options. They feature coempetitive interest rates, flexible tenures, and easy online account management. With minimal documentation and quick processing, open an FD from your home and watch your savings grow securely.

FAQs

1. Do all FDs have the same tax benefits?

No, regular FDs don’t offer tax deductions, but tax-saving FDs allow deductions up to ₹1.5 lakh under Section 80C. However, interest earned on all FDs is taxable.

2. Do FDs require a large initial investment?

No, most banks and financial institutions allow you to start an FD with a small amount. It can be sometimes as low as ₹1,000, making them accessible to various investors.

3. In case of an emergency, is breaking a fixed deposit the only option?

No, you can avail of a loan against your fixed deposit without closing it prematurely. This allows your FD to continue earning interest while providing funds for emergencies.

4. Do FDs offer low returns?

No, FDs offer competitive interest rates, ensuring steady growth of your savings. While returns may be lower than high-risk investments, FDs provide assured returns and stability.

5. Can investing in a family member’s name help save taxes?

No, let’s say you gift money to a family member, and they invest it in an FD. Then, the interest earned will be clubbed with your income and taxed accordingly. There are certain exceptions for spouses under specific conditions.