As financial security is the cornerstone of a stable future, investment in Fixed Deposits (FDs) can be an ideal strategy. This traditional avenue has proved to be a dependable way of growing your funds. It offers a guaranteed return by locking the deposited sum for a specified time.
Maximising your returns and ensuring that your fixed deposit aligns with your financial requirements requires careful consideration. Here are 5 key factors to ponder before you open an FD account.
Issuer’s Credibility
Fixed deposits are relatively safer investment instruments, as they remain unaffected by market fluctuations. But this does not mean they are free from any risk.
The failure of some Non-banking Financial Companies (NBFCs) and cooperative banks in recent years indicates that you must be extra cautious when booking an FD. Here are some tips to follow for choosing an authentic institution before entrusting your hard-earned money:
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Prefer opening an FD with banks, as the Deposit Insurance and Credit Guarantee Corporation (DICGC) insures deposits with these banks to up to ₹5 Lakhs
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If you are opting for NBFCs or cooperative banks, ensure that they are well-established and have a solid track record
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Check the credit ratings of NBFCs to ensure their financial stability, which is easy when you compare ratings awarded by CRISIL and ICRA
Interest Rates
Interest rates are the primary factor that influences your FD returns. It can vary depending on the bank’s policy, the type of FD you have opted for, the deposited sum, and its tenor. Hence, it is crucial to shop around to get the best option.
On Bajaj Markets, you can book FDs at competitive rates of up to 9% p.a. Compare different fixed deposit plans and their interest rates to maximise your returns. What’s more, you can apply for an FD with an investment amount of ₹1,000.
When deciding on an option, remember that some small finance and private sector banks offer the highest FD interest rates. These can be 200-300 basis points higher than the rates offered by the Public Sector Banks (PSBs).
Flexibility of Tenor
Before you invest in an FD, take into account your liquidity requirements and the time horizon for which you can keep the money invested. Financial institutions allow you to select a tenor ranging from several days to 10 years. Note that while short-term deposits can offer higher liquidity, FDs with longer tenors typically provide higher returns.
If you prematurely withdraw funds, FD issuers impose a penalty of up to 1% on the effective interest, which can wane off a significant part of the interest you earn. Thus, choose your deposit tenor with special consideration based on your investment objectives and future financial commitments.
To enjoy flexibility, you can also opt for a flexi FD that comes with a combination of a savings and fixed account. This helps you enjoy the liquidity of a savings/current account along with high FD returns.
Tax Implications
Another essential consideration to make before investing in a fixed deposit is tax applicability. Here is a brief overview of tax provisions related to the FD investment as per the Income Tax Act of 1961:
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The interest income earned on FD investments is taxable as per your income tax slab rate
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A TDS at a rate of 10% is deducted in case the annual interest income exceeds ₹40,000 for regular citizens
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For senior citizens, the annual limit to enjoy exemption from taxes on FD interest is ₹50,000
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Under Section 80TTB, senior citizens can also enjoy an exemption of an additional ₹50,000 on any interest earned from banks and post offices
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Note that the TDS will be charged at 20% if you do not submit a PAN card to the issuer
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If your total taxable income is below the taxable limit, you can get a refund or avoid tax deduction by furnishing Forms 15G (regular investors) and 15H (senior citizens)
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Under Section 80C, you can also enjoy tax exemption of up to ₹1.5 Lakhs on tax-saving FDs, which come with a lock-in period of 5 years
Payout Options
Fixed deposits allow you to choose from different interest payment options, including monthly, quarterly, half-yearly, and annually. You can also opt for a single payout at maturity. The frequency of payouts can have a significant impact on cash flow.
If you need a regular source of income, FDs that provide interest payouts at specific intervals can be an ideal choice. Choosing an FD with a payout at maturity can be more beneficial as you can accumulate a sizeable sum. The latter usually provides higher interest rates than FDs with regular payouts.
While fixed deposits provide guaranteed returns, choosing the right option requires strategic planning. Before applying, compare the interest rates and choose a suitable tenor based on the flexibility you need.
You can watch your money grow steadily and contribute to your financial security when you invest in long-term FD. Thanks to the power of compounding, remember that even smaller investments in FDs can accumulate to become a significant sum.
