Fixed deposits

Uncertainty of the Stock Market and with the ease of inflation has made Fixed Deposit Products popular among the investors seeking assured returns. Fixed Deposits can be available from Banks, Housing Finance Companies and even Manufacturing Companies. However the rate of interest and the term will vary from bank to bank, company to company. Fixed Deposits taken not only gives the assured returns but it is also considered as a risk free return also.
Investing in Fixed Deposits of Banks is safer than the investing in Manufacturing Companies or Housing Finance Companies as Banks are regulated and monitored by the Reserve Bank of India. Another advantage of FD schemes are that they can get you loans of up to 75-90% of the amount deposited with the bank.
Here are some points to get the most out of FD schemes:
Before you decide to invest your money in a Bank FD, first find out the rate of interest that is offered by different banks. Apart from the rate of interest you also need to check the tenure of your deposit. The interest rates and tenure will vary from bank to bank. The interest rates are calculated on Quarterly, Half Yearly or Yearly or on maturity. So you must find which banks offers higher interest. If one bank offers an interest rate of 10% p.a on a fixed deposit of five years and the interest is calculated on a quarterly basis, and other bank offers the same interest rate for the same period, but the interest is calculated on a yearly basis. In this case the first bank providing interest on quarterly basis will give you more interest than the later one.
You must know that investing in Fixed Deposit is also tracked under Income Tax. The tax applicable is on the interest earned during a year. This is called as TDS (tax deductible as source). The rate of tax is 10% if the interest earned exceeds Rs 10,000 in a financial year. The tax liability of TDS is determined at the branch level.
So to avoid TDS, you can break your fixed deposits, that is, open fixed deposits in different branches of the bank or even you can open fixed deposits in different bank, so that the interest earned does not exceed Rs 10,000 in a particular branch. You could also open fixed deposits in different banks to avoid TDS.
The advantage of breaking or splitting your fixed deposits is that in case you need money urgent then you can easily break the FD of one bank keeping other FDs as it is. In case of a single FD of large amount you have to break the whole FD and you will be in loss. You could get the money by breaking either one or two FD accounts while the remaining accounts would continue to earn you the predetermined interest.
As like Mutual Funds Dividend option like Dividend Payout and Dividend Re-invest here in FDs also you have the option of either withdrawing the interest earned or reinvesting the same. If you opt for the withdrawal option, the interest earned will be credited to the savings account specified by you on a regular basis. The interest you earn every year will be higher compared to the previous year if you keep reinvesting the interest this is called as cumulative fixed deposit. On the other hand, if you withdraw the interest, you will earn the same interest every year until maturity.
Let’s take an example. If you are investing in a Fixed Deposit of Rs 50,000 for Five years having interest rate of 9.5 per cent p.a. and the interest is calculated on a quarterly basis. If you reinvest the interest, your total interest earned will amount to Rs 29,955.49 in Five years. On the other hand if you withdraw the interest, your total interest earned will amount to Rs 24,609.55. That is a difference of Rs 5,345.94. The bigger the fixed deposit, the bigger the difference will be.
Fixed Deposits is also providing a benefit of Tax saving. With Assured return you are eligible for exemption under Section 80C of the Income Tax Act 1961. However, TDS is applicable. These fixed deposits come with a lock-in period of five years and you can not withdraw it before maturity. The maximum amount you can invest is Rs One Lakhs and you cannot use this deposit as a means to secure loan.