A Fixed Deposit is a safe and strategic investment option that involves money being deposited in a bank or NBFC for a fixed period of time. Upon doing this, you’re entitled to earn some interest, which is added to your deposit. The final amount (interest and principal) is paid to you at the end of the maturity period.
This kind of deposit can also be understood as liquid asset because it can be utilized during emergencies. And it’s one of the safest investment options available in the market today as they’re offered with an additional insurance cover from Deposit Insurance and Credit Guarantee Corporation (DICGC)—a government body regulated by the Reserve Bank of India (RBI). Under this cover, DICGC safeguards payable deposits amounting up to Rs.1 lac for every depositor and bank, during the failure of the latter.
Another benefit of Fixed Deposit schemes is that some banks and NBFCs offer loans and credit cards against the deposited amount. This is definitely a bonus as the deposited amount keeps adding on interest until maturity, and your financial emergencies are met with satisfactory payouts.
The tenure for an FD scheme can be anything between 7 days to 10 years and interest earned on Fixed Deposit rates in India differ from bank to bank. However, the general rule is—longer the tenure, higher is the interest amount. To give you a gist of how a Fixed Deposit works, consider the following scenario:
Say you’ve opted for an FD scheme at an NBFC with an opening deposit of Rs.2 lac and a 10-year tenure. The NBFC offers you 8% interest, which is compounded annually. At the end of the tenure, you receive a maturity amount of Rs 4.3 lac. This is more than twice the initial deposit because you receive an interest amount of Rs 2.3 lac.
6 facts about Fixed Deposits
Now that you know how Fixed Deposits can be beneficial to your savings plan, it’s time to focus on some facts that’ll clear the doubts that envelope such a deposit scheme.
- Bank or company?
It isn’t only banks that run Fixed Deposit schemes. Many companies and NBFCs have Fixed Deposit provisions for retail investors. Although they offer higher rates of interest than the ones offered by banks, their schemes are regulated by proper guidelines stipulated under Section 58A of the Companies Act.
However, Fixed Deposit schemes by NBFCs and companies are unsecured when compared to banks because the latter comes with insurance covers of up to Rs.1 lakh.
- Tax benefits
If you’re under the impression that all Fixed Deposit schemes with a tenure of 5 years can offer you a tax benefit, think again. Under Section 80C, tax benefits are applicable only for select 5-year FD investments. These include schemes undertaken from a bank, and cannot be pledged or withdrawn during the entirety of the tenure.
- Spotlight on returns
There is always a confusion when the subject is return on investment. Many believe that returns are higher if payable interest is regular. However, that is just a myth. The fact is, a cumulative Fixed Deposit fetches more only at the time of maturity. This happens due to the power of compounding, wherein the interest is compounded at uniform intervals.
- Tax deducted at source
Tax Deducted at Source (TDS) is deductible in a single financial year if the interest exceeds Rs 10, 000 for banks and Rs 5, 000 for company deposits. However, for those who do not have access to additional pools of funds, rake in an income below the taxable limit, or are minors, housewives, and senior citizens, can get away with their TDS intact. All that’s required is a submission of Form 15G, or Form 15H for the elderly, to the NBFC/bank before the initiation of a financial year.
- Fixed Deposits for emergencies
Banks and NBFCs allow the withdrawal of funds from Fixed Deposits during financial emergencies. If a situation arises that requires additional funds, you can withdraw some from your FD and let the balance gather interest as usual.
Some financial institutions also offer flex-schemes that rake in additional or unused funds in your savings account into the deposit. When a cash crunch befalls you, conveniently utilize the funds under the Fixed Deposit, which can be fragmented as per your request. Alternatively, some banks also offer credit against the Fixed Deposit, which can amount up to 80-90% of the FD amount.
- Income on Fixed Deposits
This might come as a surprise for some but the income generated from Fixed Deposits should be included in the annual tax returns. This income is listed under ‘Income from other sources’.
- Returns on FDs and stock markets
The following is a fact—returns on FDs are comparatively lower than those of the stock market. This is due to the fact that FDs cannot compete with inflation. For instance, if the inflation rate is at 9% as compared to an annual 10% return, the worked-out return would be the difference between the two, which is a meager 1%. Conversely, stock market returns are much higher in the long run even when inflation rates hike, which boils down to one rule—the higher the risk, the higher the returns.
Although fixed deposits might seem like a viable option in order to save big, you must always consider the returns, interest, taxes, and inflation before signing up. Consider employing the help of a professional in order to know if such a saving scheme is the right one for you and your family.