Fixed Deposits (FDs) are a preferred method of saving for many. These are considered safe and liquid assets that one can use to fulfil any unforeseen need. Even though FDs are a safe and liquid option, investors often look at inflation while investing in them.
When the FD is created, there might be a mismatch between the actual return on investment and the investor’s expectations. Know about FD returns in the article below and see how the returns get decided for your deposit amount.
Understanding Inflation and its Impact on FDs
Inflation is the rate at which the value of money depreciates over time. As it is influenced by global, local, and market conditions, there’s nothing investors can control on FD returns in India.
Fixed Deposits may not serve the higher slab investors, while the short-term depositor in the lower tax slab may get some benefits. In the long run, tax and inflation rates may eat into the returns from a Fixed Deposit. So they must consider inflation while investing in FDs as it affects the actual return on investment.
FD Interest Rates and Inflation
Different banks offer various FD schemes with different interest rates. The interest rate directly impacts the actual return of your FD. Higher interest rates offered by a bank on its FD scheme can result in higher returns for the investor. For instance, if Bank A offers an FD scheme with a 7% interest rate and Bank B offers an FD scheme with a 6% interest rate, an investor depositing the same amount for the same duration with Bank A will earn more returns than one depositing with Bank B.
Therefore, when choosing an FD scheme, it is important to compare the interest rates offered by different banks.
Impact of Taxation on FDs
It is important to note that the interest rate offered by the bank is not the only factor affecting an FD’s actual return rate. The tax rate on the interest earned also plays a role.
So investors should also consider the tax burden on FD interest earnings. The interest earned on FDs is taxable under the Income Tax Act. The tax rate is based on the investor’s tax slab.
FD Interest Rate Tax Slab TDS Rate TDS Deducted
Up to Rs. 10,000 Nil Nil Nil
Rs. 10,001-40,000 30% + 0.4% cess 10% 1% of FD amount
Above Rs. 40,000 30% + 0.4% cess 10% 10% of interest amount
Please note that this table assumes that individuals fall under the highest tax slab of 30% + 0.4% cess, as stated in the information provided. Additionally, the interim budget of 2019 has increased the TDS deduction limit on FDs to Rs 40,000 per year for AY 2023-24.
Use an FD Calculator
Investors wishing to estimate the actual return on their FD investment can use FD calculators, widely available on bank websites. These calculators consider the investment amount, tenure, and interest rate to estimate the maturity amount and actual return on investment. To use an FD calculator, simply follow these steps:
- First, gather all the necessary information regarding your Fixed Deposit, such as the principal amount, interest rate, and the FD tenure.
- Open an FD calculator, and enter the required information. You may need to input the principal amount, the tenure, and the interest rate. Some calculators may also require you to choose the compounding frequency and the type of interest (simple/compound).
- Once you have entered all the information, click the “calculate” button to get your return result. The calculator will show you the maturity amount of your FD, which includes both the principal and the interest earned. The interest earned will depend on the interest rate, the tenure, and the compounding frequency you choose.
An FD calculator can help you estimate the maturity amount of your Fixed Deposit. By comparing the maturity amount with the principal amount invested, you can determine the actual rate of your FD. This rate represents the interest rate at which your FD has grown over the tenure of the Deposit, and it can help you evaluate the performance of your investment.
So it’ll be easier to compare your FD with other investment options to determine the best investment strategy for your financial goals.
Note: The actual rate of your FD may differ from the calculator rate due to factors such as compounding, taxes, and fees.
Conclusion
Investors need to recognise the safety and reliability of FDs as an investment option while also considering the impact of inflation and taxation on their actual return on investment.
By evaluating the real return on investment, investors can make informed decisions that take into consideration the current high inflation rate and low FD interest rates. It allows investors to maximise their returns and achieve their financial goals.
