How Does Fixed Deposit Help You Save Money?

Whether you are a salaried person or self-employed, saving money is one of the essential requirements for you. However, saving money is easy to say than doing it. We all want to save a certain amount of money but end up spending it all, but this can lead to many problems especially in the long run when you need money for some emergency. Therefore, it is always a smart choice to save money instead of spending less. Therefore, you must choose to save your money and after that manage your expenses to get ready for any situation of emergency that can come in the future. In addition to this, it is always advised to start saving money from the early stage of life and make lesser debts, if possible.

The thumb rule to start saving is to make a monthly budget and stick to it and when you have surplus funds, you should invest them instead of keeping them in your savings account. This will enable you to earn more interest in your investment funds. For investment, you can select the stock market, mutual funds, etc. However, all these investment options have high risks associated with them and on the other hand, fixed deposits earn fixed returns on your funds without involving any risk.

Here we are going to discuss fixed deposits and how they help you to save your money:

What is a Fixed Deposit?

It is a type of term deposit that is considered one of the safest investment options that are available in the insurance market. Most of the Indian banks and financial institutions offer the facility of fixed deposits. The tenure of FD ranges from seven days to 10 years. You can get high FD interest rates than a normal savings bank account and the interest can be credited on a yearly, quarterly, and monthly basis. In FD you have to invest your needed amount in one go. If you want to withdraw funds before the maturity period, financial institutions and banks may charge a penalty on premature withdrawal on your FD.

Reasons to Invest in Fixed Deposits

The fixed deposit schemes offered by banks are considered as one of the safest investment options wherein you invest a lump sum amount for a specific period. The rate of interest on FDs depends on tenure and the principal amount that you invest. For example, PNB FD interest rates are 5.20% for a deposit that is less than Rs.2 Crore and for a tenure of one year. The interest in FD is paid out in two ways –

1. Cumulative Deposit:

Under this, the interest is calculated on an annual and quarterly basis and it is paid out upon maturity.

2. Non-Cumulative Deposit:

Under this, the interest is calculated quarterly, annually, or at discounted monthly rate.

The corpus that you get upon maturity can be used to purchase a house or land, marriage or education of children, and for fulfilling other investment goals. Mentioned below are some reasons to invest in a fixed deposit:

  • The facility of Premature Withdrawal and Closure: As we all know that FD interest rates are higher than normal savings accounts. This is because the NBFCs and banks utilize the funds as cash flow. Therefore, for all the premature withdrawals NBFCs and banks levy penalties. The principal amount that is invested remains unaffected, however, the interest earned is cut by a certain percentage. However, the option of premature withdrawal provides liquidity that makes FD a popular option of investment. If you wish, you can as well close your fixed deposit account and take out all your money at the time of emergency.
  • Preferential FD Interest Rates for Senior Citizens: Most of the Non-Banking Financial Companies and Banks provide a higher rate of interest on FDs for senior citizens. Generally, NBFCs and Banks provide an additional 0.50% on FD interest rates for normal people. However, the additional rate of interest may vary across banks and NBFCs.
  • Tax Saving FDs: According to the Income Tax Act, 1961, if the interest earned from FD is up to Rs. 40,000, it is exempted from tax and this limit is Rs. 50,000 for senior citizens. In a five years tax-saver fixed deposit, the principal amount that you have invested is eligible to avail tax rebate U/S 80C of the IT Act. Your invested amount is locked-in for five years and you can withdraw it only after completion of the five years or upon maturity. In addition to this, you cannot avail of loans or get credit cards against a tax-saving FD.
  • Loan Against FD: Loan against FD is one of the important factors when you invest your money in FD. You can get loans against fixed deposit investment. These loans are generally offered at a very low rate of interest.   
  • Insurance of Deposits Up to Rs. 1 Lakh: When you invest in a fixed deposit, you get insurance for the deposits up to Rs. 1 lakh. If you want to invest a huge amount, then instead of investing the entire amount in one FD, you should split the amount into smaller amounts so that you can get insurance for every fixed deposit.

How Does a Fixed Deposit Help You Save Money?

Investing your money in fixed deposit not only help you to earn money, but it also enables you to save money in the following manner:

  • Fixed deposits enable you to save money over a long term as it does not provide the facility of premature withdrawal without penalties. Penalties upon premature withdrawal refrain you from withdrawing money before maturity.
  • With FDs, you get to earn an interest that is higher than a savings account.
  • You can also avail of loans against your fixed deposit.
  • You can also get a credit card against your FD. The credit limit of such credit cards is a maximum of 90% of the fixed deposit amount.
  • FD provides you an option to get the interest monthly, annually, quarterly, or upon maturity.
  • The interest income that is earned on FD of a maximum of up to Rs. 40,000 in one year is exempted from TDS.
  • If you invest in a tax-saving FD, you get a tax rebate under section 80C of the IT Act.

The Bottom Line:

Even though financial institutions and banks allow you to withdraw money before the maturity date, but the premature withdrawal of FD attracts a penalty. So, you may save a lot of money by opening an FD account and keeping the deposited amount till maturity.

Written By: PolicyBazaar - Updated: 19 February 2021
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