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Fix Deposit as a Popular Choice for Investment



Fix Deposit as a Popular Choice for Investment

Investing in a fixed deposit scheme is a very popular choice for many individuals who like to have a part of their financial portfolio invested in fixed-income instruments for providing stability. Fixed deposits promise the rate of return on your investment and thus create a secured corpus. Banks and non-banking financial companies offer fixed deposit schemes at attractive interest rates to lure prospective customers. Moreover, if you choose to invest in a 5-year fixed deposit scheme, you also save your taxes as these schemes allow you a tax-free deduction of INR 1.5 lakhs under Section 80C on the deposit that you make. But what happens when you withdraw from your fixed deposit account before the stipulated tenure? Do you lose on taxes as well?

When understanding taxes and premature withdrawal from fixed deposits, you should first understand what premature withdrawal is and what it entails.


Withdrawing from your fixed deposit account

Though fixed deposits come with a stipulated tenure, many times you might have to withdraw from the scheme before the completion of the stipulated period for meeting unplanned financial contingencies. When you do so, it is called premature withdrawal. You can withdraw partially or completely depending on your requirement.

When you withdraw before the due date, you face penalties. The financial institution with which you opened your fixed deposit account would charge you a penalty of 1% or 2% depending on its withdrawal policy. This penalty would be deducted from your account balance and the remaining amount would be paid to you. Moreover, you would also lose out on the future returns promised by the fixed deposit scheme. So, withdrawing before the due date not only lowers your deposit, it also gives you low returns.


Taxes on withdrawals

The interest that you earn on your fixed deposit account is taxable in your hands if you are below 60 years of age. If, however, you are 60 years and above, you are a senior citizen and you can enjoy tax-free interest earning of up to INR 50,000 under Section 80TTB. However, if you are not a senior citizen, the return you earn on your fixed deposit would be added to your taxable income and taxed at your slab rate. So, whether you withdraw the fixed deposit before or on the due date, whatever return that you earn would be taxable. Moreover, the financial institution would also deduct a TDS on the interest earned if you don’t submit Form 15G or Form 15H.

In case of fixed deposits which are tax-saving in nature, i.e. 5-year fixed deposits, premature withdrawals are not allowed. You would not be able to withdraw from the fixed deposit scheme before the completion of 5 years. After 5 years are over, the returns that you get would be taxable in your hands.

So, to sum up, fixed deposit interest earnings are always taxable if you are not a senior citizen. Whether you withdraw it before time or not, whatever returns you earn would be taxable. Senior citizens can enjoy tax-free returns if the interest on their deposits is up to INR 50,000. So, know these facts before you withdraw your fixed deposit before time.  

Barjunaid Cadir is a Content Writer in The Weekly Trends, Web Developer, SEO Content Manager, LinkedIn Specialist, Social Media Manager, and a University Researcher at Anadolu University in Eskisehir, Turkey.