7 Key Things to consider before Investing in Fixed Deposit (FD)
Bank Fixed Deposit (FD) is perhaps the simplest of all investment options available to Indian investors. In banking parlance, they are known as Term Deposits or Time Deposits. Anyone investing in a bank fixed deposit needs to be aware of a few important things. Here are 7 such points that one needs to take note of before locking funds in a bank FD.
1. Fixed Deposit Rate of Interest
Bank FD carries a fixed rate of interest for a fixed tenure. There are different interest rate options such as monthly, quarterly, half-yearly or cumulative that one may choose depending on the need. The tenure can be as short as 7 days to as long as ten years. Depending on one’s need, the FD can be opened for 1, 2, 5 or 10 years. At times, banks have a special tenure of say 444 days or 650 days as well. Once invested, the rate of interest remains fixed for the entire tenure. Importantly, all banks offer an additional rate of 0.5 per cent to the senior citizens on all tenures.
Latest FD Interest Rates of 5 Banks
|SBI||5.75% – 7.00%||7 days to 10 years|
|Bajaj Finserv||8.00% – 8.60%||1year to 5 years|
|HDFC Bank||3.50% – 7.40%||7 days to 10 years|
|ICICI Bank||4.00% – 7.50%||7 days to 10 years|
|Axis Bank||3.50% – 7.30%||7 days to 10 years|
2. Minimum and Maximum Deposit Limit
Most government banks including SBI have a minimum deposit limit of Rs 1,000 for creating fixed deposit. However private banks have higher limit for minimum deposit. You can avail of ICICI Bank Fixed Deposits for a minimum deposit of Rs 10,000 for General Customers and Rs 2,000 for Fixed Deposits for Minors. In case of HDFC Bank the minimum deposit amount is Rs 5,000. There is NO maximum limit but if the deposit is above Rs 1 crore, it’s called bulk deposit and generally has higher interest rates than regular FDs.
3. Cumulative vs. Non-Cumulative FD
With a cumulative FD, you can re-invest the interest earned on a regular interval. This way you get the compounding benefits and the accumulated interest is received at maturity/ at the end of the tenure. However, in the case of a non-cumulative FD, the interest is credited in the account at a regular interval, either monthly or yearly.
The interest rate in a cumulative fixed deposit is typically compounded quarterly and re-invested with the principal. Hence, cumulative FDs are suitable when you are investing to achieve a long-term goal. Non-cumulative FDs, on the other hand, are generally suitable for retired investors and pensioners who require interest income to meet their day-to-day expenses.
4. Premature Withdrawal
An unexpected need may arise before your FD matures or you may want to shift your deposit to a different financial organisation to take advantage of a higher interest rate. Anticipating situations like these, it is necessary to look at the premature withdrawal charges and whether or not the bank will permit it.
The tenure for most bank fixed deposit varies from 7 days to 10 years. However, two banks – IDBI bank do offer tenure of 20 years. In case of IDBI bank the 20 year deposit can only be done with regular payout option and not cumulative.On the other hand most foreign banks like Citibank, Standard Charted, Deutsche Bank have maximum tenure of 5 years only.
6. Loan against FD
Investing in an FD comes with a loan facility that investors can opt for, which is one of the major benefits of this deposit scheme. During any financial emergency, investors can avail loans against FDs, up to 90 per cent of their own deposit. You can avail loan up to a maximum tenure of your deposit scheme, as the maximum tenure is restricted up to the maximum tenure of the FD.
Banks usually charge interest at 0.5 per cent to 2 per cent above the applicable FD interest rate on loans against FDs. For instance, SBI offers loans against FDs at the rate of 6.25 to 7.25 per cent. While choosing the bank, compare and opt for the bank that offers you the lowest spread over the FD rate.
The interest earned on bank FD is subject to tax as per one’s income tax slab. The amount of interest income gets added to the ‘Income from other sources’ and then taxed. Illustratively, on a bank fixed deposit of 7.5 per cent per annum, the after-tax return for taxpayers in the 5 per cent, 20 per cent and 30 per cent tax brackets works out to be 7 per cent, 5.94 per cent and 5.16 per cent, respectively.
Before paying interest to the depositor, the bank is supposed to deduct tax at source i.e. TDS of ten per cent but only if the interest income exceeds Rs 40,000 in the financial year. In order to avoid deduction of TDS, one may submit Form 15G/ Form 15H to the banker.
Further, there are specified 5-year taxes saving bank FD in all banks. The investment in such qualifies for tax benefit under section 80C. Remember, that unlike regular deposits, no premature exit is allowed in them as the lock-in period in them is five years.
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