A Fixed Deposit (FD) is a savings tool offered by banks and NBFCs. A lump sum of money is deposited for a fixed tenor and which earns interest over time. FDs are also known as Time Deposits because they have a set maturity date. They are safe and offer predictable returns. This makes them popular among investors.
What is a Fixed Deposit?
FDs involve placing a certain amount of money with a bank or NBFC for a specific period. During this period, the money earns interest at a predetermined rate. The interest rate is fixed and does not change during the tenor. This makes FDs an popular option for those seeking stability and security in their investments.
Features of Fixed Deposits
Fixed Interest Rate
The interest rate on an FD remains the same throughout the tenor. This allows investors to calculate their returns at the time of investment. It also shields them from market fluctuations.
Flexible Tenor
FDs offer various tenors ranging from a few days to multiple years. You can choose a tenor based on your financial goals and needs.
Interest Payout Options
You can choose between cumulative and non-cumulative FDs. A cumulative FD compounds the interest and pays it out at maturity. A non-cumulative FD pays out the interest at regular intervals. These intervals can be monthly, quarterly, semi-annually, or annually.
Premature Withdrawal
Though FDs have a fixed tenor, you can withdraw your money before maturity. This is known as premature withdrawal. However, banks and NBFCs may charge a penalty for this.
Loan Against FD
You can avail of a loan against your FD. This helps meet emergency needs without breaking the FD. The loan amount can be up to a certain percentage of the FD value.
Benefits of Fixed Deposits
Safety
FDs are low-risk investment options as they are not affected by market risks. The principal amount and interest are guaranteed.
Assured Returns
With a fixed interest rate, you know the returns at the time of investment. This helps in better financial planning.
Flexible Tenor
You can choose an FD tenor as per your requirements. This makes FDs suitable for both short-term and long-term goals.
Regular Income
Non-cumulative FDs provide regular interest payouts. This could be a source of income for retirees and those looking for periodic returns.
Easy to Open and Manage
Opening an FD is simple. You can do it online or by visiting a branch. Managing FDs is also easy, with options to renew or withdraw at maturity.
Tax Implications of Fixed Deposits
Interest earned on FDs is taxable. This is added to your total income and taxed according to your income tax slab. Banks and NBFCs deduct TDS if the interest exceeds ₹40,000 in a financial year (₹50,000 for senior citizens). You can claim a deduction on the interest from tax-saving FDs under Section 80C of the Income Tax Act, 1961. These FDs have a lock-in period of 5 years.
How to Open a Fixed Deposit
Opening an FD is a simple process. Follow these steps:
Choose the Bank or NBFC
Compare interest rates and terms offered by different issuers. Select the one that suits your needs.
Decide the Tenor
Based on your financial goals, choose the tenor of the FD.
Fill the Application Form
You can fill the form online or at the branch. Provide necessary details like your name, address, and the amount to be deposited.
Submit KYC Documents
Submit your Know Your Customer (KYC) documents. These include identity proof (Aadhaar card, PAN card) and address proof (utility bills, passport).
Transfer the amount to the bank or NBFC. You will receive an FD receipt as proof of your investment.
Things to Consider Before Investing in Fixed Deposits
Interest Rates
Compare the interest rates offered by different banks and NBFCs. Higher rates will maximise your returns.
Tenor
Choose a tenor that aligns with your financial goals. Consider both short-term and long-term needs.
Penalties
Understand the penalties for premature withdrawal. This will help you avoid losses if you need to access your funds early.
Tax Implications
Be aware of the tax on FD interest. Factor this into your overall tax planning.
Credibility of Issuer
Choose a reputable bank or NBFC. This ensures the safety of your investment.
Advantages of Laddering Fixed Deposits
Laddering fixed deposits involves spreading your investment across multiple FDs. Each FD has a different maturity date. This strategy offers several advantages:
Liquidity
By having FDs maturing at different times, you can access funds periodically. This helps meet financial needs without breaking a single FD.
Better Interest Rates
Interest rates can vary based on the tenor. Laddering allows you to take advantage of higher rates offered for longer tenors. At the same time, it helps you maintain some short-term liquidity.
Risk Management
Laddering helps in managing interest rate risk. If interest rates rise, you can reinvest the maturing FD at a higher rate. If they fall, you still have other FDs earning higher rates.
Flexibility
This strategy provides flexibility in managing your investments. You can reinvest maturing FDs or use the funds as needed.
Regular Income
By choosing non-cumulative FDs, you can receive regular interest payouts. This helps create a steady stream of income. This is particularly useful for retirees and those needing periodic cash flow.
Fixed deposits are a reliable savings tool for both beginners and experienced investors. They offer safety, assured returns, and flexibility. By understanding the features, benefits, and tax implications, you can make an informed decision. Always compare the interest rates and terms offered by different banks and NBFCs. This will help you choose the best FD for your needs.