Seven Things to Consider Before Investing in Fixed Deposit

Fixed Deposits are perhaps the simplest and safest of all the investment options available in the Indian investment market. With higher Fixed Deposit interest rates, you can manage your financial risks, and they can help you to fulfill your goals that are aspired for various stages of life. These can be securing funds for the higher education of your children and their marriage or can work as financial support for dealing with the unexpected expenses that may come in the future.

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In this way, FDs are one of the smartest ways of building savings over some time. However, before investing in a Fixed Deposit scheme, you must consider the following points:

Maximum and Minimum Deposit Limit

Most of the government banks including the State Bank of India have a minimum deposit limit of Rs. 1,000 for FD accounts. However, private banks have a higher minimum deposit limit. The minimum limit of ICICI Bank FDs is Rs. 10,000 for regular customers, and it is Rs. 2,000 for minor FDs. In the case of HDFC Bank, the minimum deposit for FDs is Rs. 5,000. Generally, there is no maximum limit for investing in a fixed deposit scheme. However, if you deposit more than Rs. 1 Crore, then it is called a bulk deposit, and it attracts a higher rate of interest than regular FDs.

Fixed Deposit Interest Rates

The fixed deposits of banks carry a fixed interest rate. There is a different rate of interest options like quarterly, monthly, cumulative, and half-yearly that you can choose as per your requirement. The tenure for opening your FD can be as short as seven days and as long as ten years. Depending on your requirement, you can open an FD account for one year, two years, five years, or 10 years. Once you have invested in an FD scheme, the interest rate remains the same for the complete tenure of FD. It is necessary to know that almost all the banks offer additional interest rate for senior citizens. For example, the Bandhan Bank FD rates for tenure of seven days to 14 days for regular people are 3.00%, and for senior citizens, it is 3.75%.

Non-Cumulative and Cumulative Fixed Deposits

With a non-cumulative fixed deposit scheme the rate of interest is credited in the FD account in regular intervals either yearly or monthly. While with cumulative fixed deposits, you can re-invest the interest that you have earned in regular intervals. In this way, you get the benefits of compounding, and the accumulated interest can be received when the tenure ends or at the time of maturity. The interest that you get on cumulative deposits is generally compounded every quarter and it is re-invested with the principal amount. In this way, cumulative fixed deposits are preferred when you want to invest for the long-term. Whereas non-cumulative fixed deposits are most of the times suitable for pensioners and retired people who need regular income to meet their day to day requirements.

Term of Deposit

The term of fixed deposit or tenure varies from seven days to 10 years. However, some banks offer a maximum tenure of 20 years, and some banks have a maximum tenure of five years. So select your term of deposit or tenure as per your need.

Premature Withdrawal

Premature withdrawal is withdrawal wherein you close your FD before its maturity date. There can be a situation wherein you want your money invested in FD before its maturity. So, you must also look for the penalty that your bank may charge in case of premature withdrawal. Therefore, it is suggested to look for this factor as well before investing in any FD of a bank.

Loan against Fixed Deposit

Investing in an FD account comes with a facility of loan that you can opt for. It is one of the best advantages that you can get with your fixed deposit account. You can get a loan against your FD at the time of any financial emergency. Generally, banks offer up to 90% of your FD amount as a loan. The maximum tenure of your loan is restricted to the maximum tenure of your FD. The rate of interest that banks charge on loan against your FD can range from 0.50% to 2% over the fixed deposit interest rate.

Taxation

The interest that you earn on your bank’s FD is subject to taxes according to your income tax slab. The fixed deposit interest amount earned is considered under Income from other sources’ and taxed accordingly. For example, on a fixed deposit of a bank, if the interest earned is 7.5% per year, the after-tax return for the taxpayers in the tax brackets of 5%, 20%, and 30%, can be 7%, 5.94%, and 5.16%, respectively.

However, before paying FD interest to an investor, the bank is required to deduct tax at source, which is TDS of 10%, but only when the interest earned is more than Rs.40, 000 in one Financial Year. Therefore, to avoid the TDS deduction, you can submit Form 15G/ 15H to your banker. In addition to this, there are tax-saving fixed deposit schemes in most banks with tenure of five years. The investments that you have made in such FDs are eligible for benefits of tax U/S 80C of the Income Tax Act. You should remember that opposite to regular FDs, tax-saving FDs do not have the facility of premature withdrawal, and your money is locked-in for five years in such FDs.

The Final Words!

So, these are some of the tips that you must keep in your mind before start investing in any fixed deposit scheme of a bank or some other financial institution. Keeping this can enable you to select the most suitable Fixed Deposit and get the best rate of interest so that you can fulfill your future requirements for which you are investing. If you are a senior citizen then you will get an additional fixed deposit interest rate.

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