Fixed Deposit: A Holistic View Of The Concept

What is a Fixed Deposit?

Investment instruments offered by banks and non-banking financial companies, where you can deposit money for a higher rate of interest than savings accounts are called as Fixed Deposits (FD). One can deposit a lump sum of money in fixed deposits for a specific period, ranging from 7 days to 10 years.

Once you invest the money with a reliable financier, it starts earning an interest based on the duration of the deposit. The defining criteria for fixed deposit is that the money cannot be withdrawn before maturity, but you may withdraw them after paying a penalty.

What are the features of Fixed Deposit?
  • Enable investors to earn higher interest on their surplus funds
  • One can deposit money in a fixed deposit account only once, if you need to deposit more, you need to create another account
  • Liquidity in fixed deposits is lesser, so, you can look for higher rates of interests, which are higher in case of company fixed deposits
  • One can easily renew fixed deposits
  • As per the Income Tax Act, 1961, tax is deducted at source, from interest on Fixed Deposits as applicable
What are the benefits of Fixed Deposit?

Following are the few benefits of Fixed deposit: –

  • Safest investment instruments, and offer greater stability
  • Assured returns on fixed deposits and no risk of loss of principal
  • No effect of market fluctuations on your fixed deposits, which ensures greater safety of your investment capital
  • Higher interest rates offered by company fixed deposits
  • Some financiers offer greater returns for senior citizens
What is the Interest Rate on Fixed Deposit?

The interest rate of a Fixed Deposit is a return for your investment. It is a percentage of your deposit amount that the NBFC or bank will pay you. Every financial institution offers different interest rates for a Fixed Deposit. It can vary from 3% to 9%. The interest rate is considered as the most important factor while choosing your FD, as it can directly affect your maturity amount. For example, if you deposit Rs.1,00,000 for one year at 5% interest rate, you will get Rs.1,05,000 at the end of the year as the maturity amount. You will earn Rs. 5,000 as the interest on your principal amount. The senior citizens get special interest rates of additional 0.35%.

Is Fixed Deposit Taxable?

Yes! It is. Interest earned from Fixed Deposits is taxable under the head ‘Income from Other Sources’. The interest will be taxed at the same rate as your gross income and can vary from 0% to 30%. For instance, if you fall under the 30% income tax bracket, you will have to pay 30% tax on the interest earned from your Fixed Deposit. But then, if the interest earned does not exceed Rs. 10,000, then you don’t have to pay any tax on the interest. Though, the amount invested in a tax-saving Fixed Deposit can be exempted under Section 80C of the Income Tax Act, with a maximum exemption of up to Rs.1.5 lakh per year. Tax-saving Fixed Deposits have a lock-in period of 5 years.

What are the different types of Fixed Deposit?

There are different types of Fixed Deposits (FDs) offered by NBFCs and banks. Each Fixed Deposit scheme has its own unique features and caters to different needs of an investor.

  • Regular FD: Under this scheme, you deposit your money with a financial institution for a fixed tenor, ranging from 1 week to 10 years. The rate of interest on FD is pre-determined but is usually higher than the savings account.
  • Tax saving FD: This particular FD helps you save income tax. The principal amount of the FD gets tax exemption, up to Rs. 1.5 lakh in a year. But, your investment is locked for a period of five years and funds can’t be withdrawn before the maturity date. This scheme is for people above the age of 60 years. In this scheme, senior citizens can earn an additional interest rate of 0.35% from the regular FDs.
  • Flexi FD: Your fixed deposit will be linked to the savings account allowing the investors to withdraw certain sum of money
How to choose best Fixed Deposit plan?

The following things can help you to pick the best Fixed Deposit plan:

  • Interest rate: The most important factor is to compare the interest rates on FD offered by different NBFCs and banks. As per the current marketing trend a rate closer to 8% or above is a good deal.
  • Check credibility: Check the credible ratings from reputable organisations like ICRA or CRISIL.
    and go for only A rated deposit schemes.
  • Deposit tenor: Usually, longer duration deposits offer higher interest rates. Check for the lock-in period of the FD scheme.
  • Interest calculation and payouts: Enquire the frequency of interest payouts, whether it is monthly, quarterly, half-yearly or annually. Also, check for the option to reinvest the interest earned to increase your FD corpus.
  • Penalty: Enquire the penalties for breaking an FD before maturity in case of any emergency. Most of the NBFCs and banks lower the interest rates in case of premature withdrawal.
How to choose FD Calculator?

It is a free online tool where you can calculate Fixed Deposit to get its potential returns.  One can calculate the maturity amount of a Fixed Deposit by entering a few basic details. Also, the maturity amount varies with the type of customer, type of deposit, tenor, and the amount of deposit.

 

 

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