All you need to know before you invest in Fixed Deposits
Everything you should be aware of before you choose to invest in Fixed Deposits:
Fixed Deposits commonly known as Term Deposits, are fixed interest bearing debt instruments which need to be held for fixed duration with the particular issuing entity. These impose penalties on premature withdrawal and require you to stay invested for the predetermined duration. You get flexibility to choose the tenure, avail loan/overdraft facility, etc on FDs. So, before you decide to open an FD, here are some of the important things that you should be aware of:
You can open an FD with Banks, Post-office, NBFCs and Corporates.
Fixed Deposit Plans
There are two plans available:
• Traditional/ Non-cumulative Plans: Under this plan, the principal gets invested for the tenure chosen by you and interest is paid on monthly, quarterly or annual basis based on the frequency of the interest payout option opted by you.
• Reinvestment/ Cumulative Plans: Under this plan, interest is compounded on a quarterly basis and is reinvested along with the principal. The accumulated amount is paid out at the time of maturity. The maturity duration varies between 6 months to 10 years.
Fixed Deposits offer a fixed rate of interest based on the tenure of an FD. The interest rate varies from banks to banks and is calculated on the monthly, quarterly or annual basis.
Inflation and Fixed Deposits
Not many people are aware that the Fixed Deposits does not cover Inflation. In other words, FDs does not offer a positive real rate of return. Real rate of return is the actual return on your investment after subtracting the inflation rate.
For instance, if your bank pays an annual interest of 7.5% on your FD and the prevailing inflation rate is 9%, then the real rate of return on your FD will be -1.5%.
Also read: Inflation and the Real rate of return
Minimum and Maximum amount
The minimum deposit required to open an FD varies from banks to banks and ranges between Rs. 1,000 to Rs. 10,000. There is no upper limit.
For instance, the minimum amount that can be deposited in State Bank of India is Rs. 1,000. Initial deposit of Rs. 5,000 is required to open an FD in HDFC Bank.
The tenure ranges between 7 days – 20 years and varies from banks to banks. For instance, minimum tenure for Axis Bank is 6 months. In SBI and ICICI Bank minimum and maximum tenure is 7 days and 10 days respectively. The minimum and maximum tenure in case of IDBI Bank is 15 days and 20 years respectively.
Depositors have to pay tax on the interest earned on Fixed Deposits as per their income tax slab. In addition to this, if the yearly interest on an FD exceeds Rs. 10,000 in a financial year, banks will deduct TDS at the rate of 10% on the interest earned if the depositors have submitted their PAN with the bank. If PAN is not submitted, TDS is deducted at the rate of 20%. These deductions are exclusive of cess and surcharge.
Note: If you are not eligible for TDS, you can avoid TDS by submitting form 15G. Senior citizens can submit form 15H.
Loan against FD/ Overdraft Facility
You can avail loan against your Fixed Deposits. This facility is available up to the remaining tenure of your FD on a renewable basis. The applicable interest rate will be one or two percent higher than the existing rate on your FD. Interest on loan availed is charged on the utilised amount and for the tenure of the utilisation. Minimum loan amount is Rs. 25,000. The maximum loan amount varies from banks to banks.
For instance, Axis Bank provides loan facility of up to 85% of the value of your FD. SBI, HDFC and ICICI Banks give loan facility of up to 90% of the FD value.
Note: Banks do not charge any processing fee for loan against Fixed Deposits. Also, for most of the banks, there is no penalty for prepayment of the loan.
Safety of Deposits
Deposits in banks are insured up to Rs. 1 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC) in case of banks getting closed down. This amount includes the principal and the accrued interest.
All commercial banks including local area banks, branches of foreign banks functioning in India and regional rural banks are covered. Also, all state, central and primary co-operative banks are covered under this insurance scheme, other than the one from the Union Territories of Chandigarh, Lakshadweep, Dadar and Nagar Haveli and the State of Meghalaya.
Banks provide premature withdrawal facility to the depositors in part/full. Not all banks offer partial withdrawal; you have to withdraw the entire amount. However, you have to pay a penalty on premature withdrawal that ranges between 0.5% – 1%. The interest on the deposit for the duration it has remained with the bank is calculated at the rate applicable to the duration for which the FD was held with the bank and not the actual rate applicable on FD.
For instance, you have an FD of 390 days, and the actual rate applicable is 7.5%. However, if you break the FD in 180 days, and the applicable rate is 6.8%, then the interest on the FD will be calculated at 6.8%. Also, a penalty of 0.5% – 1% will be levied on 6.8%.
It is available at the time of opening an FD with all the banks. You can add or modify the nominee details any time later.
It is available with all the banks at the time of opening an FD or any time before the FD matures. Through this facility, your FD gets renewed automatically for the duration same as the original deposit. Axis bank gives the option of rolling over only the principal or principal and interest accrued in reinvestment deposit scheme.
Tax Saver FD
Banks also offer Tax Saver FD. The tenure for such FD is 5 years and the maximum amount that can be deposited in a financial year is Rs. 1.5 lakh. The minimum deposit amount varies from banks to banks and ranges between Rs. 100 – Rs. 10,000. You can opt for monthly or quarterly interest payout. You are also eligible for tax benefit under section 80C of the IT Act, 1961.
Note: Loan/overdraft and premature withdrawal are not available in Tax Saver FD.
Post Office Time Deposit Account
You can also open an FD in Post Office. The account can be opened through cash or cheque mode. You can transfer such account from one post office to another. The minimum deposit amount is Rs. 200 and there is no upper cap. Premature closure is allowed after 6 months from the account opening date. The minimum and maximum tenure is 1 year and 5 years respectively. Interest on such account is calculated on a quarterly basis and paid on annual basis. In case of a 5 year deposit, you are eligible for tax benefit under section 80C of the IT Act, 1961.
FDs in Co-operative Banks
All state, central and primary co-operative banks have been active in India and pay higher interest rates on deposits. Although Co-operative banks offer higher interest rates, keeping your money in such banks is always riskier and the depositor has to bear the loss in case of bank failure or any fraud. DICGC covers FDs in Co-operative Banks up to Rs. 1 lakh, but if the deposit is more than Rs. 1 lakh, then you have to bear the losses.
There have been instances in the past which has raised questions on the credibility of Co-operative Banks. Few of such instances are listed below:
• In April 2003, RBI suspended Amanath Co-operative Bank after the top officials in the bank were accused of Rs. 300 crore fraud.
• A similar incident was reported in June 2015, when 6 Maharashtra Co-operative banks were accused of being involved in Rs. 10,000 crore fraud.
• Back in Sept 2010, a scam of Rs. 758 crore from Pen Co.op Urban Bank Ltd came into limelight after the inquiry from CBI.
You can open a deposit with a company or a corporate for a fixed tenure with a prescribed rate of interest. Such a deposit is termed as a Corporate Deposit or Company Fixed Deposit. These deposits are governed under Section 58A of the Company’s Act. Interest in such deposit is paid on a monthly, quarterly, half-yearly, yearly or on a maturity basis.
However, there is always a default risk associated with such deposits. It’s important that you check the ratings of these deposit schemes. Avoid depositing your money in low rated schemes.
Fixed Deposits are saving instruments which can help you to earn timely interest with fixed rate of return. Do remember the above points before you decide to deposit your hard earned money.