Bank Fixed Deposit interest rates in the country have been falling for quite some time now. As overall interest rates in the economy keep heading downwards this trend is natural. The current interest rates are now comparable to what was seen in the early 2000s. It is natural that investors find that the instrument is not very attractive in terms of returns. Taking into account the fact that the interest earned on the bank fixed deposit is taxable the net return comes down even further for those in the higher tax brackets.
This does not mean that all investors should stay completely away from bank fixed deposits because there are certain situations and categories of people who would still find it useful to have some sort of exposure to them. It is important for every individual to see what is right for them and then ensure proper allocation of funds to a particular asset class or instrument. Here are some of the situations when a bank fixed deposit would still work for you.
Absolutely Zero Risk
Any investor who needs some money at a specific time in the near future and cannot take any risk about not having the sum at the required time can use the bank fixed deposits for their needs. This could be something like an amount to be spent on children’s school fees or some expenditure on a function or it could be some amount needed for purchasing a house consumer durable. These amounts cannot be disrupted and the best way to ensure that this goal is met on time is to use a safe instrument that will pay out the specified sum no matter what is the economic situation.
Small Amount And Short Term Needs
There might be some requirements where the money is needed in a short period of time. The time for the requirement is known and this cannot be changed. If this is the case then the bank fixed deposit will ensure that you can make the right calculations and arrive at the amount that you need to invest to get the required funds. This is especially relevant when the amount involved is small so trying to get a percent or so more using other instruments will not have any big impact on the extra amount earned.
Senior citizens require income on a regular basis and this makes fixed deposits a permanent favourite option for them. At the same time, there are a couple of other points that are beneficial when they keep some amount in bank fixed deposits. The first is that there is a higher rate of interest that is available for senior citizens as compared to normal investors in most banks.
This can range from 0.25 percent to 0.75 percent. This boosts their earnings and this is something that everyone should make use of. The other thing is that there is a tax benefit in terms of a deduction of Rs 50,000 for income that is earned as interest on bank fixed deposits under Section 80TTB. This makes it important that they are able to earn this tax-free income up to the limit given to them.
Zero Tax Bracket
Those in the lower or zero tax bracket have an advantage with respect to bank fixed deposits because this ensures a couple of their goals are met. These investors are usually risk-averse investors and they can relax and at the same time also ensure little impact on net returns. The investor can submit Form 15G/15H to ensure that there is also no tax deduction at source.
Cash Flow Match
There are a lot of times when individuals need cash flow at a certain point of time. This might not be possible with every instrument because higher returns might not lead to cash flow at the required moment. This is where bank fixed deposits score because here one can get an income in different ways ranging from quarterly to annually to even at maturity where this matches the day on which the money is required.
(Arnav Pandya is the Founder of Moneyeduschool.)