Fixed Deposits Guide
A fixed deposit is best suited for those investors who want to invest a lump sum of money at a low risk and are comfortable committing it for a fixed period of time, and earn a rate of interest on th same.
Some of the salient features of a bank deposit are:
- Flexible Deposit Terms : The tenure of fixed deposits can vary from as low as 7, 15, 30 or 45 days to 3, 6 months, 1 year, 1.5 years to 5 years. The minimum deposit amount also varies with each bank. It can range from as low as Rs. 100 to an unlimited amount with some banks. The amounts can be in multiple of Rs. 100.
- Great Deals: The banks are free to offer varying rates of interest for products of different maturities. If you are flexible in terms of deposit tenures, you might find differential interest rates in odd tenures like 390 days or 200 days.
- Safe Investments: Bank deposits are generally safe investments because they are insured under the Deposit Insurance & Credit Guarantee Scheme of India.
- Flexible Interest Payment Terms : A Bank Fixed Deposit gives you the option of taking the interest income, as a lump-sum amount on its maturity as well as every quarter (quarterly interest payment) or every month (monthly interest payment)
- Electronic Clearing: The Interest payable on Fixed Deposit can also be transferred directly to Savings Bank or Current Account of the customer.
- Compounding: Compounding of fixed deposit interest rate is available for all deposits more than 3 months.
Tax implications
The interest income earned on a deposit is taxable at the same tax slab as the customer is in. It will be added to his income in the year under the head “Other Income”.
Fees and Charges
Normally, there are no charges for a plain vanilla fixed deposit account. Charges are usually levied on premature withdrawal of the deposit or taking additional features like a debit card against it.
Alternatives to Fixed Deposit Accounts
FMP- Fixed Maturity Plans ( A type of mutual fund)
The similarity first: Both have fixed tenures.
The differences:
- Returns: A fixed deposit in India gives assured returns. You know what you are getting and when. An FMP will give an indicative, but not assured, return.
- Investment Amount: You will be expected to invest a minimum of Rs 5,000 in an FMP. Not so in the case of a bank deposit, which can be less.
- Tax Treatment: An FMP gets preferential tax treatment making it a better option then Fixed deposits for returns on a post tax basis. While fixed deposits are taxed at the normal tax rate – FMP dividends are tax free in the hands of the investor ( there is a 14.26% Dividend distribution tax deducted at source). And in case the investor opts for the growth option for tenures more than one year, his gains will be taxed as long term capital gains on debt investments. The tax rate under which is 10% without indexation and 20% with indexation benefit.
Company Deposits & Bonds ( Deposits with companies both financial and industrial)
The similarity first: Both have fixed tenures and have the same tax treatment.
The differences: Since these are investments with private companies with no insurance protection as well – these investments are relatively riskier then bank fixed deposits and consequently offer better returns as well.
They also have constraints in terms of the number of tenures that they offer deposits- usually short term deposits which are 6 months and less are not found in company deposits.
Watch Out For….
The NET RETURN that you get from an Fixed Deposit – Post compounding and tax payment. A rate which might seem higher upfront might have a lower return if it is not compounded as frequently.
For example; Bank X offers a one year deposit at the rate of 9% compounded half yearly – which results in an yield of 9.2%. While Bank Y offers a one year deposit at the same rate of 9% but compounded quarterly – which results in an yield of 9.3%.
