Investing in Fixed deposits – Pros and Cons

Fixed deposits are traditionally accepted as a favored investment option among Indians. These are also popularly known as term Deposits. Even though fixed deposits are giving you a stable and fixed return, there are many drawbacks due to which many financial advisers suggest not to invest in it.

Let us look into these benefits and drawbacks one by one.

Drawbacks of Investing in Fixed Deposits

Interest rates of fixed deposit

Interest rate of your term deposit is fixed during the entire tenure of the deposit. But, when market interest rate goes up, you will not be getting higher interest rate based on this movement.

Another problem is inflation. If inflation of our country goes up then you actually end up getting less amount compare to the purchase power on the date of maturity.

Tax on interest Income

Interest is the only income that you get from your fixed deposit. Such interest amount is not tax free as per the income tax law of our country. If your interest is more than 10,000 rupees, then bank has to compulsorily deduct TDS from it. However, you also have option of submitting form 15G or 15H if you are not taxable.

Penalty for early withdrawal

The major drawback of investing in fixed deposit is penalty for early withdrawals. If you have decided to withdraw your invested amount before maturity then penalty will be levied based on the time of withdrawal. Such penalty is called premature penalty and differ from bank to bank.

Benefits of Investing in Fixed Deposit

Investing in fixed deposit has also some benefits like the risk of not losing money. Investor who wants to take advantage of this are advised to invest for a short duration so that after maturity it can again be renew for another short time based on the market conditions.

Another best part of investing in fixed deposit scheme is that you can take loan by keeping it as security.

Banks prefer fixed deposit as the best security to sanction loans. If you have a FD in a bank, then that bank can lend you 75%-80% of the invested amount as loan. Additional security along with fixed deposit will also enhance your eligibility.

If you can invest for a longer term and blocking it for 15 years is not an issue then we suggest you to invest in public provident fund instead of investing in a FD. Investment to public provident fund can be claimed as income tax deduction u/s 80C of income tax act and at the same time interest income from this fund is also tax free.

is a fellow member of the Institute of Chartered Accountants of India. He lives in Bhubaneswar, India. He writes about personal finance, income tax, goods and services tax (GST), company law and other topics on finance. Follow him on facebook or instagram or twitter.