Senior Citizens Must Have Fixed Deposits In Their Portfolio. Here’s Why

Fixed deposits (FDs) have been a lifeline for senior citizens over the years and their attraction hasn’t diminished even now. The overall economic scenario has led to a surge in investments into equities, with record inflows being witnessed into equity mutual funds through the Systematic Investment Plan (SIP) route. At the same time, senior citizens are investing in fixed deposits in numbers never seen before. A recent study by the State Bank of India pointed out that, from 4.1 crore accounts worth Rs 14 lakh crore in FY19, the number of senior citizen FD accounts has gone up to 7.4 crore accounts worth Rs 34 lakh crore in FY23.

There are several reasons why senior citizens should consider FDs for their portfolio.

The first factor that makes FDs a reasonable choice for senior citizens is that the interest rate on the investment is fixed and known at the time of the investment. This ensures that there is no worry about the earnings once the deposit has been made. Fixed deposits come with the facility of a payout as per the requirements of the individual, and this can be quarterly, half-yearly, annually or even at maturity. This completes the need to have money in hand from the earnings on the investment. The most important factor is that the overall rising interest rate scenario has led to a situation where the FD rates have gone up and these are attractive so investors can actually lock themselves into a good high rate for the next few years.

There is an extra benefit for senior citizens when it comes to interest rates because the banks usually give them 0.50% to 0.75% higher rates as compared to what a normal person would get. This ensures that the final amount of earnings for the senior citizen increases and it's this extra earning that often pushes the returns here higher than what they would get in several other instruments. While senior citizens can also utilise the Senior Citizen Savings Scheme, the investment amount is capped at Rs 30 lakh. At the same time, other instruments that have slightly higher returns than the bank FD also need to be evaluated for the risk element. 

There’s a tax benefit for those senior citizens who are still using the old tax regime because there is an extra deduction of Rs 50,000 for them when it comes to interest from savings banks as well as fixed deposits. This benefit is not available for non-seniors, as they can only get a Rs 10,000 deduction on savings bank interest. It is highly unlikely as well as wasteful for someone to earn large amounts of interest from keeping large amounts in their savings bank account so the best way to use this limit is to earn from fixed deposits. For a senior citizen, using up this limit is a benefit as they can ensure that a larger part of their income is taxed at a lower rate, which will reduce their tax impact.

The problem of tax deduction at source (TDS) is also lessened for senior citizens, as they have two options that they can benefit from. On one side is the fact that there's no TDS on FDs until Rs 50,000 of interest is earned. This is high and the senior citizen will have some relief on this front as lower amounts will not have TDS. At the same time, there is also the option for the senior citizen to submit Form 15H and ensure that there is no tax deduction if their total income is such that it does not cross the taxable mark. This can be helpful because no tax deduction at this stage can prevent the trouble of having to go and claim the refund from the tax department at the time of filing the tax return.

Arnav Pandya is the founder of Moneyeduschool.