Why you shouldn’t invest in a Tax saving fixed deposit

Fixed deposit — pre-tax vs. post-tax returns

In India, we do not talk about post-tax returns when talking about the returns of bank fixed deposits. Interest earned on fixed deposit (FD) is taxed at the tax slab rate of the individual. If an individual decides to invest Rs 10,000 in an FD at 9 per cent interest rate, pre-tax interest earned during the year would be Rs. 900. Tax on the interest earned at 30 per cent tax rate would be Rs 270, and net amount earned by the investor would be Rs 630.

This translates into a net return is 6.3 per cent, which is much lower that the presumed return.

Withdrawing pre-maturely from FDs

If you need your money back before the maturity of the FD, you will receive a lower rate of interest and also pay a penalty.

Over exposure in fixed deposits can be risky for long term goals

Conservative investors should understand that investing only in fixed deposits alone can result in over exposure in a particular asset class (fixed income products) which will not only imbalance the portfolio but will also impact the overall return on investment. Fixed Deposits are not capable of beating inflation in long term. Inflation erodes the major part of returns offered by Fixed Deposits and this is the reason why one may not become rich or wealthy. Fixed Deposits are also not tax friendly. Interest earned on most of these instruments is taxable. The returns in Fixed Deposits are lower and thus to achieve a particular goal a conservative investor needs to invest more as compared to an aggressive investor.

Debt Mutual Funds are an excellent alternative to Tax Saving Fixed Deposits

Safety of Capital is almost the same. With debt funds, you get

1. superior returns post-tax,

2. high level of liquidity, and

3. safety of capital compared to FDs

Source: https://tackk.com/why-you-invest-in-tax-saving-fixed-deposit