1. FDs should be for meeting short-term commitments, park emergency corpus.
2. Interest income from FDs is wholly taxed. It is added to your total income annually and taxed as per the income slab rate applicable to your total income.
3. FD investments can't beat inflation and lose value. For example, if the nominal rate of return is 8% and inflation is 5%, the actual rate of return will be 2.8% CAGR. That means your money will be growing actually at 2.8% per annum but not at 8%.
4. One can't get an indexation benefit on FD returns.
5. FD kept in the financial institutions will be auto renewed with the maturity proceeds of previous FD, which may attract penalty if redeemed before maturity.
6. The interest rate on the loan availed on FD will be more than the actual interest rate earned by the same FD.
7. As per Budget 2021: Government to introduce pre-filled ITR forms with capital gains, interest income. So cumulative interest earned on different FDs kept at different banks will appear on an individual's ITR form, which will attract tax.
8. Even if a person is not opted to get annual interest on his FD, he has to disclose income accrued but not received on the FD annually, add it to the income for that year, and pay tax as per the income tax slab rate. If not done so, it will attract a considerable penalty.
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