The fixed deposit is a popular avenue to invest your hard-earned money as it comes with assured returns, flexibility, liquidity, safety and ease of transaction. It’s a preferred mode of investment for senior citizens as interest earned on it can be used for their monthly expenses. With the FD interest rates rising, both PSU and private banks are offering a rate ranging between 7% and 7.35%. There are a few banks that are offering FD interest rates above 8% p.a. as well. Therefore, it would be wise to do a thorough research of all the interest rates before selecting one for yourself. It is equally important to have a fair knowledge about few crucial aspects of fixed deposits before investing.
Deposit Limit: The minimum deposit limit ranges from Rs. 1,000 to Rs. 10,000 depending on the bank. For example, you can open an FD with a prominent national bank with just Rs 1,000, however, some private banks may have a minimum deposit limit of Rs. 5,000 to Rs. 10,000. There is no cap on the upper limit, however, the rate of interest depends on amount deposited. If the deposit amount is above Rs. 1 crore, banks consider it as bulk deposit and so the interest rate is higher than the usual FDs.
Interest Payment: Generally, you are paid interest cumulatively along with principal on the maturity of FD. But if you wish, you can have the interest paid out in monthly, quarterly or annually to get regular income. Besides, compounding of interests on FD can be done monthly, quarterly, semi-annually. Most bank FDs compound quarterly. The more frequently your FD compounds in a year, the higher your interest income.
Extra interest: If you are a senior citizen or 60 years of age, then you get a slightly higher interest rate. Generally, banks offer extra interest rate of 0.25% to 0.75% for senior citizens. Also, if you are a current or former employee of the bank where you have opened the FD, you can avail an additional interest rate of 1% on domestic deposit below Rs 1 crore, depending on the policy of the bank.
Duration: Generally, the tenure of fixed deposit ranges from 7 days to 10 years. However, there are some banks, which offer a maximum tenure of 5 years only and some who offer tenure of 20 years, but payout is regular and not cumulative.
Premature Withdrawal: You may have set up a FD for 5 years, but after a year, you may need some cash for emergency needs. You can then break your FD and withdraw your money. But remember, banks will charge you an interest rate penalty for premature withdrawal. The penalty can vary from 0.50 % to 1 % on the interest earned, depending on the amount invested in FD. So, withdraw it only if there is no other option.
Partial Withdrawal: Not all banks are rigid when it comes to FD. To offer liquidity in FD, some banks permit partial withdrawal with the same terms and conditions. It means, if you invested Rs 5 lakh, you may withdraw say Rs 1 lakh and continue with the FD of Rs 4 lakh with the same interest rate and other conditions.
TDS: Banks will deduct 10 % TDS if the interest accrued in the FD in the financial year is more than Rs 10,000. For senior citizens, the limit is Rs 50,000. But if your annual income is less than the tax limit, you can submit Form 15G or Form 15H (for senior citizens) to avoid TDS.
Interest As ‘Income From Other Sources’: You will have to show interest earned on FD as ‘income from other sources’ when you file the returns. If you are in the 30% tax bracket, then you will have to pay additional tax as TDS was only 10 % on interest income. Also, if FD is taken in joint name, then the first holder is liable to pay the tax. Besides, do use the nomination facility in your FD. You can nominate different people for different FDs, and that too in the same bank.
Loan Facility: A good advantage of FD is that you can easily avail loan facility against it. Banks offer loan of 90% of the principal amount. Some banks offer 90% of principal amount and the interest accrued. You can also avail credit card backed by these FDs. Hence, FDs offer you liquidity when you need cash and you don’t need to break it or withdraw partially or prematurely.
Tax Savings FD: These are investment tools to save tax under section 80C of the Income Tax Act, 1961. The demerits of this FD are that you cannot withdraw it prematurely or take loan. It comes for a fixed tenure of 5 years. It’s primarily a tax-savings instrument.
The above discussed features make fixed deposit a preferred mode of investment for many investors looking for risk-free investment instruments.
The writer is CEO, BankBazaar.
BankBazaar.com is a leading online marketplace in India that helps consumers compare and apply for credit card, personal loan, home loan, car loan, and insurance.