Your Fixed Deposit will be subject to tax deduction at source
If you are looking to invest in Fixed Deposit Scheme, you must be aware of the negative points of the option before making a decision.
Fixed Deposit is an attractive investment option and offers regular returns. These deposits are a good idea for those who are risk averse in terms of investing their savings. With the recent cycle of repo rate hikes by the Reserve Bank of India (RBI), many banks have increased the interest rates offered on fixed deposits.
But, FD has its disadvantages too. If you are looking to invest in Fixed Deposit Scheme, you must be aware of the negative points of the option before making a decision.
Disadvantages of Fixed Deposit:
1. Fixed Interest Rate:
The rate of return is fixed for the term of the fixed deposit. In the event of an increase in the interest rate on new FDs in future, existing investors will not be able to take advantage of this.
2. Diminishing Returns:
Fixed deposits offer lower returns as compared to stocks and mutual funds.
3. Premature Withdrawal Penalty:
If you wish to close your Fixed Deposit before reaching maturity, you will be liable to pay penalty. This makes FDs an ineffective option if you want to invest more flexibly.
4. Savings is locked:
Since your money is locked in for the investment period, you will not be able to withdraw the money if you need to reinvest in a better scheme.
5. Liquidity Problem:
If you have a financial emergency then accessing FD at a moment’s notice is difficult.
6. Can’t Beat Inflation:
Since the interest rate is fixed, those who opt for fixed deposits for a longer period, for example 5 years, their interest rate will remain fixed while inflation increases. Their returns will not beat inflation under most circumstances.
7. TDS:
Your Fixed Deposit will be subject to Tax Deduction at Source (TDS) if your overall income is taxable. The interest on term deposits will be deducted as per your overall tax bracket, thereby reducing the returns.
8. Bankruptcy Risk:
If the lender files for bankruptcy, your savings will be gone. According to the Deposit Insurance and Credit Guarantee Corporation of RBI, an investor will be able to get insurance of only Rs 5 lakh. If the FD is above Rs 5 lakh, the remaining amount will be lost.
While FDs are a good investment option and provide timely returns, consider these factors before opening a fixed deposit.
