Thursday, December 31, 2020

Fixed Deposits - Worst Investments for Long Term

 First time, I helped a person in filing a return who paid more income tax due to "income from other sources" than "income from salary" [Of course, by taking "income from other sources" to the top bracket].

The culprit is Fixed deposits.

That person is using FDs to save all her money and there is a significant amount in the Fixed Deposits. She does not need the money anytime soon and she put FDs with cumulative interest and automatic renewal.

One needs to pay the income tax on the entire interest that is realized every financial year. Even if one does not take the interest from the FD, even if the FD is not closed/renewed in that financial year, still the tax has to be paid, because the bank is adding the interest to the FD and it is income for you. You need to pay tax on the interest at the top bracket.

If you are having significant money in the bank, you would be forced to pay a lot of tax.

FDs are the worst possible investments especially for long term. One should use FDs only to keep money for emergencies or to use in the next few months.

For short term investment, I recommend Liquid Mutual Funds (or even Debt MF). With Liquid (or Debt) Mutual Funds, one needs to pay the tax only at the time of withdrawal. If we withdraw after 3 years, the profit is adjusted with the inflation, and the tax would be even less.

For long term investment (6 years or more), I recommend either Equity Mutual Funds or Land.

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