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I have some fixed deposits with maturity dates ranging from one year to two-and-a-half years. They were taken during the last two years. Is it prudent to renew them in view of the present increase in interest rate? Thank you in advance. - Anonymous
Investing in fixed deposits has its own ups and downs.
The upside is the safety of investment. Money sitting in a bank can be considered absolutely safe especially if it is a financial institution that is too big to fail. Downside is that the rates are fixed and you will not be able to take advantage of changing interest rates.
An alternative of fixed deposits are debt mutual funds, specifically liquid funds and short-duration funds.
These funds provide better returns and have maturities similar to that of fixed deposits. At present, most of the big banks are offering 7 per cent per annum for fixed deposits with maturities ranging between one to three years. Short duration funds have similar maturities and, at present, offer yields on an average of 7.4 per cent and as high as 7.7 per cent. These will change according to market conditions such as interest rate hikes by the central bank.
Income tax on interest on fixed deposit
Income from fixed deposits would be subject to tax as per the slab rates applicable to you whereas the gains from debt mutual funds would be subject to capital gains tax depending on the holding period. Since your investment horizon is one year to two-and-a-half years, you will be subject to short-term capital gains tax and taxed as per slab rates. However, if you were to invest for more than three years, then it would become a long-term capital asset and you will be taxed at the rate of 20 per cent with the benefit of indexation.
Suggested read: These debt funds can help you counter RBI's rate hikes
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