Don't let the new RBI rule or TDS spell bad news for your FD income

Let’s say you have a fixed deposit with a bank. Once this FD matures, you would ideally either withdraw or renew it. However, what happens if you fail to do either? In that case, the FD continues to remain as an idle deposit with the bank. This is what we call an overdue FD.

Also, if a fixed deposit has no transactions for 10 years or more, the RBI classifies it as an unclaimed FD.

What happens to the interest on FDs in these cases? Up until recently, the amount left unclaimed with the bank continued to attract interest. This rate of interest was the same as that applicable to savings deposits. A circular issued by the RBI on July 2, 2021, however, has changed this.

What does the new RBI rule say?

According to the new RBI rule, the interest on any unclaimed deposit amounts will be paid at the lower of the following:

• The rate applicable to savings accounts, or

• The contracted rate of interest on the matured deposit

So, what does this mean for depositors? Well, savings account rates are generally lower than FD rates. So, this ultimately means that depositors who don’t claim their FDs will end up earning very little interest, since the rates applicable would be the same as savings bank interest rates.

For example, say a depositor invests in a 5-year FD that gives interest at 5% per annum. The same bank offers interest on savings accounts at 2% per annum. At the end of 5 years, if the FD remains unclaimed, the interest payouts would dwindle down to 2%.

How can depositors avoid getting affected by this new rule?

The easiest way to ensure that you don’t get affected by this is to make sure your deposits are not overdue. You can do this in any of the following three ways.

• Renew your fixed deposit with the same bank

• Withdraw your funds from your FD

• Reinvest the funds in a new FD account

The bottom line – Make sure you don’t keep the funds idle in the same fixed deposit account. Besides, if you have multiple FDs, set reminders to avoid missing out on their maturity dates. Also, as a precautionary measure, you can add the FD details in your will so the lawyer can ensure it’s paid out and not left unclaimed in unforeseen circumstances.

TDS on FD interest can also affect your returns

Sure, when you invest in fixed deposits, you can evaluate the future returns. But tax deducted at source (TDS) could probably come as a surprise you didn’t plan for. TDS on fixed deposit can reduce the net returns from your FD.

For example, say you’ve invested in a fixed deposit that offers you interest at 5% per annum. At the end of the investment period, your calculations show that you’ll earn Rs. 30,000. But when the amount is deposited in your savings account after 5 years, you see that you’ve only received Rs. 27,000.

What do you think happened to the remaining Rs. 3,000? Well, that portion represents the TDS on FD interest. And you don’t receive it as a part of your interest payout. That can be quite a shock, right? Thankfully, there are some ways to work around this.

How to minimise TDS deduction on your FD?

There are three ways to minimise TDS deduction on your fixed deposit. Check them out here.

1.Time your FD right

TDS on FD interest is deducted only if the interest in a financial year exceeds Rs. 10,000. So, you can time your fixed deposits such that the interest in any one financial year stays below this limit.

For example, say you invest a said amount in an FD on April 1, 2021. At the end of that financial year, you will get Rs. 14,000 as interest. And that would be eligible for TDS. However, if you invest in the FD on October 1, 2021, instead, you will only receive half that amount in this financial year. That would be Rs. 7,000 – well below the threshold.

The table below summarizes this for better clarity.

2.Split your investments

If you have a large amount to invest, chances are, the FD interest could exceed Rs. 10,000. To work around this, you could open multiple fixed deposits with different banks. Then, invest a portion of your capital in each of them. That way, you can ensure that the interest from each FD is below Rs 10,000. You know what that means, right? No TDS on those FDs. Sure, you may have to pay the income tax later but, you can avoid the compounding loss now.

3.File your Form 15G or Form 15H

Another easy way to avoid tax deduction is to file Form 15G with the bank. If you are a senior citizen, you need to file Form 15H instead. These forms are a declaration that your income is below the exemption limit. So, these forms are an indication to the banks that tax need not be deducted on your FD interest.

Conclusion

So, you now know how to optimize your FD interest despite the RBI’s new rule and TDS. All that remains is to open the best FD for your needs. And for that, all you have to do is open a fixed deposit in Bajaj finance. The Bajaj Markets App makes it easy to open an FD and invest for your future. In addition to a quick FD opening process, you also enjoy exclusive app-only rewards and reliable chatbot assistance for your queries. Download the