Putting money in Fixed Deposit attracts income tax on withdrawal.
Let's assume that you want to invest 10Lakhs rupees in fixed deposit with the current 9% interest rates. At the end of the year, you will earn a massive 90 thousand as an interest on this 10Lakhs fixed deposit.
10Lakhs FD for 2yeaR 16 days will earn you 9% interest in HDFC Bank.
So, at the end of 1 year you will have 10L90K.
But, this interest is taxable. Only to a max 10K there is no tax on bank deposits. So, remaining 80K will attract income tax at 30% rate.
10% tax of 80K is around 8K. This is a big amount.
As per section 206AA introduced by Finance(No.2) Act.2009 effective April 01,2010,every person who receives income on which TDS is deductible shall furnish his PAN,failing which TDS shall be deducted at the rate of 20% in case of Domestic deposits and 30.90% in case of NRO deposits.
Hence, what you earn at the end of it is 90-10% of 80K = 82K.
It also means, you are earning an interest of 8.2% only instead of 9% on your money. And in the worst case this will come down to 7.4% (lower than PPF 8% interest).
But, this is the case when you earn a bank interest rate of 9% on your money. But when bank interest rate on FD is 7% then your effective earning comes down to 70K -10% of 60K = 6.4% on your money.
Now, if you would have put your money in PPF then you would enjoy 8% interest rate with whatever happens to Indian Financial market or Global market or Economic recession.
Plus you will be free from all your worries about income tax.
That is why I advised you to put your money in PPF which can be opened in SBI or Post Office. Now a days, you can online deposit your money into SBI PPF a/c. And the interest you earn is less than 9% but 8%. The good part of this investment is that on withdrawal this is tax free. No need to pay any income tax on the entire amount you get once the PPF a/c matures.
So, go and open your PPF a/c today with minimum of Rs500/- per annum.
If you want to invest some lum-sum money into your PPF a/c after 5years then that money will be get locked only for 10years for you and not full 15 years.
And you will still enjoy a guaranteed return of 8%.
You might earn much more return if you invest your money in Mutual Fund, but there is no guarantee that your money will compound at the same rate. In case of recession your money will not perform, and will lead into losses.
Further this helps you diversify your investments.
--Kongkon
Let's assume that you want to invest 10Lakhs rupees in fixed deposit with the current 9% interest rates. At the end of the year, you will earn a massive 90 thousand as an interest on this 10Lakhs fixed deposit.
10Lakhs FD for 2yeaR 16 days will earn you 9% interest in HDFC Bank.
So, at the end of 1 year you will have 10L90K.
But, this interest is taxable. Only to a max 10K there is no tax on bank deposits. So, remaining 80K will attract income tax at 30% rate.
10% tax of 80K is around 8K. This is a big amount.
As per section 206AA introduced by Finance(No.2) Act.2009 effective April 01,2010,every person who receives income on which TDS is deductible shall furnish his PAN,failing which TDS shall be deducted at the rate of 20% in case of Domestic deposits and 30.90% in case of NRO deposits.
In that case, your overall earning will be 90-20% of 80 = 74K meaning 7.4% on your money.
Hence, what you earn at the end of it is 90-10% of 80K = 82K.
It also means, you are earning an interest of 8.2% only instead of 9% on your money. And in the worst case this will come down to 7.4% (lower than PPF 8% interest).
But, this is the case when you earn a bank interest rate of 9% on your money. But when bank interest rate on FD is 7% then your effective earning comes down to 70K -10% of 60K = 6.4% on your money.
Now, if you would have put your money in PPF then you would enjoy 8% interest rate with whatever happens to Indian Financial market or Global market or Economic recession.
Plus you will be free from all your worries about income tax.
That is why I advised you to put your money in PPF which can be opened in SBI or Post Office. Now a days, you can online deposit your money into SBI PPF a/c. And the interest you earn is less than 9% but 8%. The good part of this investment is that on withdrawal this is tax free. No need to pay any income tax on the entire amount you get once the PPF a/c matures.
So, go and open your PPF a/c today with minimum of Rs500/- per annum.
If you want to invest some lum-sum money into your PPF a/c after 5years then that money will be get locked only for 10years for you and not full 15 years.
And you will still enjoy a guaranteed return of 8%.
You might earn much more return if you invest your money in Mutual Fund, but there is no guarantee that your money will compound at the same rate. In case of recession your money will not perform, and will lead into losses.
Further this helps you diversify your investments.
--Kongkon
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