Advantages of Fixed Deposits for Small Business Owners
August 07, 2024
Starting and expanding a small business requires financial support. As an entrepreneur, you may be wondering about the best financing options available to you. One such option that can provide stability and growth opportunities for your business is Fixed Deposit (FD). In this blog, we have explained the advantages of Fixed Deposits for small business owners.
1. Stable Returns and Precise Forecasting
One of the key advantages of FDs for small business owners is the assurance of stable returns. When you open an FD account, you deposit a specific amount of money for a predetermined period at a fixed interest rate.
This fixed interest rate allows business owners to precisely forecast their returns over the duration of the deposit.
2. Liquidity Management and Capital Use Optimisation
Business owners can improve cash flow by staggering their FD investments. This means setting up several FDs with different maturity dates, so funds become available at regular intervals. The strategy is commonly termed as FD Laddering.
This approach avoids large, lump-sum withdrawals and ensures access to money when needed. Additionally, by reinvesting the matured FDs or using the funds for business growth, owners can better manage their capital and support expansion.
3. Diversification and Risk Reduction
Diversifying investments helps reduce risk. Including Fixed Deposits (FDs) alongside assets like equities, bonds, or mutual funds enhances overall portfolio resilience. Unlike market-linked investments, FDs protect the principal from fluctuations, making them ideal for risk-averse entrepreneurs.
Investing in FDs safeguards capital from market volatility and economic uncertainties, ensuring financial stability.
4. Tax Benefits
FDs also offer tax benefits as the interest income is subject to standard tax rates.
One such FD tax exemption is the deduction on FD interest available under Section 80 TTB of the Income Tax Act. According to this provision, senior citizens (individuals aged 60 years and above) are eligible for TDS exemption of up to ₹50,000 on FD interest in a financial year. Please note that this TDS exemption on FD interest is applicable for FY 2024-25 (till March 2025). For FY 2025-26, the current TDS exemption limit has been hiked to ₹50,000 for regular citizens and ₹1 lakh for senior citizens. If the interest income is more than this threshold in a financial year, 10% TDS would be imposed on the interest income. If the individual is unable to provide PAN information to the bank, TDS of 20% would be levied on the interest earned.
Timing FD maturities and withdrawals strategically can help business owners manage tax liabilities and maximise after-tax returns.
Let’s consider an example to understand the benefits of fixed deposits for small business owners -
Scenario:
a) Mr. Rao runs a small IT services firm and wants to ensure that he has sufficient cash flow to cover his operational expenses during slower months.
b) He decides to invest ₹8 lakhs in an FD with at an interest rate of 8%.
c) This fixed deposit acts as a buffer and ensures that he has a steady inflow of funds even when business is slow.
d) By using FDs in this way, Mr. Rao maintains financial stability, reduces stress from cash flow fluctuations. He can focus on growing his IT services firm without worrying about short-term cash shortages.
Disclaimer: The above example is for illustration purposes only. To check latest FD rates, click here.
Final Thoughts
Fixed deposits come with a range of advantages for small business owners in India. By incorporating FDs into their long-term financial planning, small business owners can maintain liquidity, manage cash flow effectively, and support their business's success.
