Things to Know Before Investing in Fixed Deposit

Fixed Deposit

Fixed Deposit (FD) is the most popular investment tool which will help in increasing your savings. When you consider fixed deposits you will be assured with guaranteed returns at higher interest rates within a fixed amount of time. Also, it is most preferred among senior citizens for its special interest rates.

People might consider stocks and mutual funds for earning more with their investments, the main drawback in those are they are considered as high-risk investment options as they depend on the market for returns. Fixed deposits don’t depend on the market for returns, so you will get stable investment with high returns. When you have excess funds, don’t keep it in your savings account that provides low-interest rates. You can Invest in Fixed Deposit that provides higher returns.

Types of Fixed Deposits

Cumulative Fixed Deposit

The interest rates in the cumulative fixed deposit will be compounded on a quarterly or yearly basis and the final amount will be during the pay-out at the time of maturity. Cumulative Fixed Deposit will best suit people who don’t need a regular income but require a larger corpus at the end of the tenure.

Non-cumulative Fixed Deposit

In a non-cumulative fixed deposit, the interest pay-outs are done on a monthly, quarterly, half-yearly and annual basis depending upon the investor’s choice. If you are a senior citizen or retired individual, non-cumulative will be of help to meet your monthly expenses.

Why Fixed Deposit is the Most Popular Form of Investment?

The reason why FD is the most popular because.

• They are easy to invest
• They give high-interest rates
• Tenure range from days to years
• You can avail a loan against your Fixed Deposit

But There are Certain Things Which You Should Snow Before Investing in a Fixed Deposit.

1.      Deposit Limit

Commonly, most banks and Non-Banking Financial Company’s have set minimum deposit amounts for FD as Rs.1000, but when it comes to the maximum amount there is no limit. Depending upon the amount you invest and the tenure you choose your interest rates increases.

2.      The Frequency of Interest Pay-Out

The principal amount for fixed deposits will be mostly paid at the start of the tenure. However, you have the authority to choose the interest pay-out frequency depending upon your needs. The interests in FD are paid out in monthly, quarterly, half-yearly and annually.

3.      Interest Compounding Interval

In most cases, the interest will be compounded on a quarterly basis. But still, there are other options like yearly and half-yearly, so make sure you ask the FD provider the compounding interval your fixed deposit has.

4.      Senior Citizens

Most of the banks and NBFC’s offer an extra 0.25% to 0.75% hike in interest rates for senior citizens. So providing an age proof can guarantee them with higher interest rates.

5.      Tenure

Each fixed deposit has its own tenure, so choose a tenure that best suits your requirement. The tenures of Fixed Deposit vary between 7 days to 10 years depending upon the financial institution you choose. Also, there is a cumulative and non-cumulative Fixed Deposit by which the tenure varies.

6.      What Happens to my Fixed Deposit After Maturity?

When you fill out a form for a fixed deposit you will be asked to instruct them on what to do when your investment matures.

There will be options given like,

• Redeem both principal and interest
• Reinvest the principal again and credit the interest alone to your account
• Reinvest both the principal and interest

When you fail to give instruction, it will auto-renew itself after the maturity. You can still change it later on through the tenure.

7.      Fixed Deposit is Not Always Secured

No all FD’s are safe and secured, you will lose money in some circumstances. Make sure to invest in a bank that is insured with DICGC (Deposit Insurance and Credit Guarantee Corporation), even that won’t insure you entirely. But you can still get at least Rs.1 Lakh when the bank shutdowns from that insurance.

8.      Early Withdrawal

When you want money urgently you have the option to cancel the Fixed Deposit partially or fully. However, it will come with a heavy penalty that would lose a significant interest in your pay-out.

9.      Loan Against Your Fixed Deposit

In most cases, the bank or the financial institutions allow you to get a loan against your fixed deposit. The interest which you get for the Fixed Deposit even after you get the loan will be the same.

When you want a credit card or a loan and you are not eligible for it due to your credit score, then you can opt for one by keeping your fixed deposit as collateral. When you do so the interest rate for the loan will also be less.

10.  Nomination

You should nominate a person for your FD. A nominee is a person who will be benefited from your fixed deposit in case of an untimely event.

11.  Tax Deduction at Source (TDS)

TDS is deducted from the interest amount you earn through your Fixed Deposit when you fall under the taxable category. There are various rules and regulations when it comes to fixed deposits taxation. The percentage of TDS depends upon the tax slab you belong to and it will be deposited during every tax period.

12.  Tax on Fixed Deposit

When you have a fixed deposit it will be taxed under “Income from other sources” when you file your tax return. After choosing that option your interest income will be taxed accordingly. If it is a joint Fixed Deposit, the first account holder is liable to pay tax.

13.  Tax Saving Fixed Deposit

Under section 80C of the Indian Income Tax Act, 1961 you can get a tax deduction when you have a fixed deposit. Any investor can get a deduction for a maximum of up to Rs.1.5 Lakhs of tax by investing in fixed deposits.

Final Words

Having a clear understanding of the above points will get you a clear idea about a fixed deposit. A fixed deposit is the most popular and best investment schemes when you want guaranteed higher interest rates, returns, and ease of investment.