Investing in Fixed Deposits? Know These Facts

It is considered as one of the most secure and safest investment options currently available in the market.

Benefits

Investing in a fixed deposit is always a smart idea. Here are some benefits that investors will enjoy if they choose to invest in FDs –

  • FDs offer assured return and no loss of the principal amount.
  • Flexibility in terms of interest pay-outs – you can opt for cumulative or non-cumulative interest based on your requirement.
  • FDs are not susceptible to market fluctuations. It allows investors a greater safety on their capital.
  • Financial institutions offer loans against FD. This facility helps you avoid breaking your FD in case of a monetary emergency.
  • Investing in 5-year tax-saver FDs enable you to receive income tax benefits of up to Rs.1.5 lakh under Section 80C.
  • Some NBFCs offer systematic fixed deposit plans where you can contribute a specific amount every month to your FD account instead of investing a lump sum fund.

Based on its benefits, fixed deposits can be categorised as a safe and assured investment instrument available in the market currently. However, before investing in an FD, every investor should keep in mind some points to make a better decision.

These include –

Ratings: Credit rating agencies categorise FDs by providing ratings based on their merit. It gives the investors a greater insight and understanding of a particular plan and helps them invest wisely. Individuals who are looking to invest should opt for FDs that come with a recognised rating.

Interest rate: The Interest rate on fixed deposits depends on the financial institution, and it varies from one company to other. Thus, investors should do their own research to find out which offers the highest fixed deposit interest rate.

Apart from that, interest on FDs can be earned in two ways –

  • Cumulative FDs: Here, individuals will receive the total interest earned on their investment along with the principal amount at the end of its tenure.
  • Non-cumulative FDs: Here, individuals can choose to receive their interest in the form of monthly, quarterly, half-yearly, or annually payouts.

Based on their financial needs and goals, investors should choose the interest-earning frequency.

Tenor: Fixed deposits that offer flexibility in terms of tenor are always the one to choose. Lock-in periods can range anywhere between 1-5 years. Individuals should choose the tenor carefully as premature withdrawal of fixed deposit is not financially viable. For example, if a person needs money after 3 years, he/she should invest for 3 years or less.

Minimum deposit: There are no fixed minimum deposit criteria for FDs; it varies from one financial institution to another. It is advisable to check with the company before making an investment.

For instance, Bajaj Finance allows its customers to make an FD with a minimum deposit of Rs.25,000. They also offer a systematic investment plan that enable customers to make a fixed monthly deposit. Having a low minimum amount threshold allows individuals more flexibility in terms of investment.

TDS: Income generated from an FD is taxable under the Income Tax Act, 1961. Financial institutions will apply TDS (tax deducted at source) on your FD interest, which ranges from 10%-30%.

If an individual earns more than Rs.40,000 in a year as interest, then 10% TDS is applicable (if your PAN details are already submitted). Individuals who don’t earn taxable income can claim a refund on TDS on FD interest. They can do so by submitting 15G or 15H (senior citizen) to their respective financial institution. The upper cap for senior citizens stands at Rs.50,000.

Nomination: Every company offers this facility to its investors. Even though it isn’t something to look out for, investors should always remember to exercise this feature while filling up the details for a fixed deposit.

To conclude, investors who are looking for an investment instrument that is secured, provides assured return and offers a competitive interest rate along with a regular source of income (non-cumulative interest) should opt for a fixed deposit. Additionally, keeping in mind the above mentioned factors can help them to invest wisely and relish the benefits.

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