Fixed Deposits

Fixed Deposits (FD)

Defining Fixed Deposits (FD)

When you want to invest your hard earned money for a longer period of time and get a regular income, Fixed Deposit Scheme is ideal

A fixed deposit is best suited for those investors who want to invest a lump sum of money at a low risk and are comfortable committing it for a fixed period of time, and earn a rate of interest on the same.

Some of the salient features of a bank deposit are:

Flexible Deposit Terms: The tenure of fixed deposits can vary from as low as 7, 15, 30 or 45 days to 3, 6 months, 1 year, 1.5 years to 5 years. The minimum deposit amount also varies with each bank. It can range from as low as Rs.100 to an unlimited amount with some banks. The amounts can be in multiple of Rs.100.
Great Deals: The banks are free to offer varying rates of interest for products of different maturities. If you are flexible in terms of deposit tenures, you might find differential interest rates in odd tenures like 390 days or 200 days.
Safe Investments: Bank deposits are generally safe investments because they are insured under the Deposit Insurance & Credit Guarantee Scheme of India.
Flexible Interest Payment Terms : A Bank Fixed Deposit gives you the option of taking the interest income, as a lump-sum amount on its maturity as well as every quarter (quarterly interest payment) or every month (monthly interest payment)
Electronic Clearing: The Interest payable on Fixed Deposit can also be transferred directly to Savings Bank or Current Account of the customer.
Compounding: Compounding of fixed deposit interest rate is available for all  more than 3 months.

Five Vital Tips on Fixed Deposits

1. Check the premature withdrawal penalty before investing.

Try and invest the money in a tenure within which you will not need the money. But definitely check on the charges applicable in case you need to withdraw in an emergency.

2. Check the frequency of compounding of the deposit, when comparing two deposit offerings.

A rate which might seem higher upfront might have a lower return if it is not compounded as frequently. For example; Bank X offers a one year deposit at the rate of 9% compounded half yearly – which results in an yield of 9.2%. While Bank Y offers a one year deposit at the same rate of 9% but compounded quarterly – which results in an yield of 9.3%. You will earn more interest on fixed deposits at Bank Y because your return is compounded annually.

3. Split your Fixed Deposit investments to avoid TDS deduction.

If the interest earned is more than Rs. 10,000 in a single branch in one calendar year then TDS would be deducted. By splitting your deposits across various banks or branches you can avoid this deduction.

4. Always appoint a nominee.

When you open a fixed deposit appoint a nominee. It is essential for a quick and hassle free transfer of accounts. The nomination facility enables the bank to release the deposit amount to the nominee without insistence on a succession certificate or probate of the will from your legal heirs.

5. Take interest payouts based on your requirements

Most banks have many interest payout options, choose the one which suits your requirements best for example if you are retired person you could go in for monthly payments of interest.

Fees and Charges

Normally, there are no charges for a plain vanilla fixed deposit account. Charges are usually levied on premature withdrawal of the deposit or taking additional features like a debit card against it.

Tax Implications

The interest income earned on a deposit is taxable at the same tax slab as the customer is in. It will be added to his income in the year under the head “Other Income”.

Benefits of Fixed Deposits

• Interest paid either monthly or quarterly
• The yield or return on a fixed deposit is different from interest. Interest paid either monthly or quarterly
• Possible to take loans against fixed deposits
• Bank fixed Deposits are exempt from income tax up to a limit of  Rs.9, 000/- under Section 80L, though TDS is applicable on interest earned on Fixed Deposits of Rs.10,000/- and above.

Five-year tax-saver FDs

In Budget 2006, the government extended tax benefits to five-year tax-saver deposits.

Eligible: Eligible for exemption on five-year deposits on investments up to

Rs.1 lakh.

Locking Period: These fixed deposits will be locked for a five-year period from the effective policy date.

Advantage and Disadvantage: 

• We cannot exercise the option of premature withdrawal. Secondly, you cannot pledge the term deposit as collateral to secure a loan to meet your liquidity needs. Similarly, banks do not offer overdraft facility on tax-saver deposits.
• Unlike the plain vanilla fixed-deposit products, these tax-saver FDs do not have the sweep-in facility. This implies, you cannot link fixed deposit to the savings account whereby the surplus funds in the savings account can be automatically invested in this fixed deposit.
• In addition, there is no overdraft facility available on the tax-saver FD. As this instrument of saving money is special due to its tax-saving status, banks do not extend relationship benefits on the tax-saver FD.