All you need to know before you invest in Fixed Deposits

Whether you’ve just got your first job or are nearing your retirement, a fixed deposit is one of the most popular and trusted savings options in India. Not only is your money safe in a fixed deposit, you also get a good return of interest on it, which is sometimes even sufficient for monthly expenses, if the deposit is large enough. This makes it a good option for those who are retired and looking for a safe place to deposit their money while also having a regular source of income that keeps them financially independent. 

It doesn’t matter if you already have an FD or are about to open one, there are a few things you need to know that will help you get the maximum value out of your money.  

Interest payouts: Banks offer interest payouts on the basis of one month, 3 months, 6 months, or cumulatively. Once you have decided your payout and tenure, the rate of interest remains the same throughout. 

Rate of interest: Senior citizens get an additional interest for all tenures. There are some banks that offer a special interest rate for new customers as well. Deposits above Rs.1 crore are considered as a ‘bulk deposit’ by some banks and accrue higher rates of interest for specific tenures. There are also banks that offer special interest rates for ex-employees and employees. 

Not all banks offer the same rate of interest for the same tenure. Before you invest or decide to just go with the bank you hold an account with, it would help to do some research and compare interest rates of different banks.  

Tenure: How long you want to keep your money in a fixed deposit will depend on your individual requirements and circumstances. It goes without saying that you will get more interest if you keep your money in for a longer period of time. Depending on the bank, tenures can range anywhere from 7 days to 10 years. There can also be special tenures such as 444 days.   

Deposit: While there is no limit on the maximum deposit that can be put into an FD, some banks do have a minimum deposit required. This could be as low as Rs.1,000 for some banks and Rs.10,000 for others. If opening an FD in the name of a minor, the minimum limit would be lower. As mentioned previously, deposits above Rs.1 crore are considered as bulk deposits by some bank and have higher rates of interest. 

Tax-saving FDS: Tax-saving FDs are a special category that allow you to save tax under Section 80C of the Income Tax Act. However, it has some caveats such as that you cannot withdraw the FD before the maturity period is up and you cannot take a loan against it either. The tenure for these tax-saving FDs is usually 5 years. 

Tax on FD: You will have to pay income tax on your FD deposit according to the income tax slab that you are eligible for. Apart from this tax, you will also be paying TDS on it, which is Tax Deducted at Source, and is paid by the bank directly to the government before the interest is paid to you. Keep in mind, however, that this is only for interest that exceeds Rs.40,000 per year.  

Loans against FD: You can take a loan against your FD up to 90% of the deposit amount. You will be paying interest to the bank on the loan but your deposit will continue to accrue interest. The advantage of these loans is that there are no prepayment penalties and the processing charges are zero. 

Premature withdrawal: There are some banks that allow you to withdraw a part of your deposit before the maturity period is up. This allows you to have liquidity when needed while also ensuring that the remaining amount continues with the original interest rate.  

Safety: How safe are your fixed deposits with banks? When there is a global or national crisis, will your money continue to be safeguarded in a bank? These are legitimate concerns that anyone will have. Under the law, you are insured up to Rs.1 lakh for the interest and principal amount which is held in the same right and capacity. All deposits are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme which implies that the government will ensure that banks do no fail to provide you with the money you deserve either on the date of maturity or when you want to make a partial withdrawal. 

In addition to the larger or nationalised banks, you can also open an FD with the RBI-regulated smaller banks, or Small Finance Banks. You might also get higher interest rates from these banks. Don’t forget to do your research before you invest. 

Fixed deposits are ideal for any kind of investor, no matter what your age, savings, or investment goals may be. They provide not only good savings, but also grow your money totally legally. 

  

Posted by Naisha Patel

I am an financial adviser and writer.

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