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5 Rules to know about if you are planning to invest in Fixed Deposits
Posted on Tuesday, March 20th, 2018 | By IndusInd Bank
Fixed deposit (FD) is the most common financial instrument known to and used by every investor. FDs are popular due to two main reasons: (1) safety of capital and (2) surety of returns.
Moreover, fixed deposits or term deposits have more liquidity as compared to other investments. In case of urgent requirement of funds, you can visit your bank and withdraw the money. Few banks also offer the facility of online closure of fixed deposits.
Although fixed or term deposit is quite a popular financial tool, there are few things unknown to most investors. Here is a list of 5 rules that you as a depositor should know if you plan to invest in fixed deposit:
1. Types of fixed deposit: There are two types of fixed or term deposit:
(i) Traditional Fixed Deposit: The capital is invested for a specific tenure. The interest paid is monthly, quarterly, or yearly as specified by you. Hence, it is also known as a non-cumulative plan.
(ii) Cumulative Fixed Deposit: The interest on the capital is compounded and the amount is reinvested for the desired tenure. The interest is paid when the term deposit matures. This way you earn an interest on interest.
2. Taxation: Most people have a misconception that the interest earned on fixed deposit is tax free. The truth is, interest income up to Rs. 10,000 per annum from a fixed deposit is exempt from tax. Deposits that earn interest of more than Rs. 10,000 per annum are liable for a 10% TDS (tax deducted at source) on the interest amount. In case your PAN is not updated in your account, then you will be charged 20% TDS.
There are people who open fixed deposit accounts in the name of their non-working spouse or minors to avoid TDS. The truth is: The interest on such deposits is also included in the interest income. You can submit Form 15G/H in your bank if your total income falls in the basic exemption tax limit. If you have not submitted 15G/H or PAN, you can claim refund later.
3. Premature withdrawal: There are no free lunches in the world, and this is true with fixed deposits, too. Although you can withdraw your funds from fixed deposit as and when required, it comes with a penalty varying from 0.5% to 1% depending on your bank’s policy. Also, the interest rate applicable on your deposit is for the duration when the funds were with the bank and not the pre-decided rate on your fixed deposit.
4. Return on investment: Fixed deposit yields a higher interest rate than savings account, but the return on investment and inflation rate may vary in the longer run. Unlike other financial instruments, capital from fixed deposits is not invested in the stock market, so the funds are secured but yield lesser returns. So, we recommend investing in fixed deposit for a duration of not more than 2 years.
5. Loan against fixed deposit: You can avail loan or overdraft facility on your fixed or term deposit. You can get loan up to 85–90% of the total fixed deposit value. The loan can be renewed along with the fixed deposit. The rate of interest on loan against fixed deposit is usually 2% higher than the interest rate on your fixed deposit. There is no processing fee or prepayment charge on this loan or overdraft facility.
Given these factors, you should not think twice before investing in a fixed deposit. So, visit your nearest branch today to start your fixed deposit.
