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Thursday, May 26, 2011

Things you should know before opening a bank Fixed Deposit

Update:As per finance bill FY 15, the exemption limit of Rs. 10,000 on deposits will be per bank basis and not per branch basis.

Gone are the days when investors used to get benefits of section 80 L, where interest earned up to Rs. 12,000 was exempted.
Now, with 80L benefits gone away, investor should be aware of TDS (Tax Deduction at Source).
Whenever your Fixed Deposit earns you more than 10,000 Rs. per year you are liable for 10% TDS deduction.In case of non availability of PAN, TDS shall be deducted at the rate of 20%.
To prevent bank from deducting TDS either form 15 G Or 15 H, needs to be submitted.
15 G form is for investors with age bellow 65 years, provided investors’ income is bellow tax exception income (presently 1, 80,000, which is supposed to become 2, 00,000 with implementation 'Direct Tax Code').
Senior citizens (with age above 65) need to submit 15 H form, provided they too fall in tax exemption income (presently Rs.2, 50,000).Tax exemption income for Senior citizens above 80 is Rs. 5, 00,000.
You shall ask me, what to do, when one is not eligible for either 15 G or 15 H.
Just chill, you have to take benefit of efficient money management.
Instead of booking a lump sum amount of FD, investor should book smaller FD’s with different banks or different branches of the same bank.As TDS is deducted at branch level, booking FD’ s with different branches of the same bank, taking care that interest earned on each FD does not exceed Rs.10,000 limit.
Suppose, Mr. Chitnis has to invest Rs. 10 lakhs in FD offering 9.25 % per annum of interest rate and he is not ready for TDS deduction.Mr. Chitins needs to make 10 FDs of Rs. 1 lakh each with different branches of a bank, so that each FD shall earn interest of Rs. 9575.83(annual return with quarterly compounding), which falls well below tax-exemption limit of Rs. 10,000.
And this is not impractical with the help of net banking, where investors can choose any branch across various Indian cities to book FDs.
PS: Saving the TDS does not mean tax exemption. 
Investors need to show the  interest (accrued or earned) in their IT returns. 

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