A fixed deposit is one of the best ways to save your money while earning some interest. Not only is it a stable investment vehicle, but the easy application process makes it one of the most popular option amongst investors.
But, before opening a fixed deposit account, you should know a few things about this investment option.
- It is Relatively Safe
If you open a fixed deposit account, your investment is quite safe. Financial institutions are regulated by the Reserve Bank of India, which ensures that they won’t default on interest payments and will pay you the principal amount on maturity.
2. Your Deposit is Insured
When you open a fixed deposit with a financial institution, up to Rs.1 lakh is insured. So even in a scenario where the lender falls into some financial difficulty, your deposit will not be lost and will be returned to you.
3. Tax Benefits
Fixed deposits of up to Rs.1 lakh are eligible for tax exemption under Section 80C. However, this tax saver fixed deposit has to be taken for a period of at least 5 years. You cannot withdraw this sum before maturity.
4. Income is Taxable
The interest you earn on your FD in excess of Rs.10,000 per year is considered taxable, falling under the head ‘Other Income’ when you file your tax returns. But this depends on your tax bracket.
So, if you earn Rs.60,000 on your Fixed Deposit at a bank, and you belong to the 30% tax bracket, the interest you owe on this income is 30% of Rs.60,000, or Rs.18,000. The bank deducts 10% as TDS (Rs.6,000).
5. Steady Income
The interest paid on fixed deposits can be realized monthly, quarterly, or annually. So for those of you without a steady monthly income, the interest payments can help cope with your regular expenses.
6. Check the Rates
Different financial institutions offer different terms on fixed deposits, and the interest rates may vary. Also, fixed deposits taken out for a longer term will earn a higher interest. But of course, your funds will stay locked up for a while. So before you invest, use a fixed deposit interest calculator available on the lender’s website to determine the ideal investment tenues and deposit amounts.
7. Take a Loan on the FD
Instead of withdrawing the money from an FD, you can take a loan against it when you’re in need of urgent finance. The interest charged on the loan is usually a little higher than the interest paid by the bank on your FD, and you can get up to 80 or 90% of the deposit amount as loan.
8. Break it Up
If you have a large amount to invest, break it into smaller chunks and invest it with different financial institutions. Remember, only deposits of up to Rs.1 lakh are insured. So instead of making a Rs.5 lakh deposit in one FD account, make 5 deposits of Rs.1 lakh in different accounts.
9. Safety versus Investment Growth
While fixed deposits are safe, they will not help offset inflation. So instead, invest a part of your savings in FDs and the remaining amount in growth funds like the stock market or in mutual funds. They come with a higher risk, but your investment has the chance to grow exponentially over a period of time.
Bank fixed deposits are a safe way to invest money, so use them to secure a part of your savings. Along with that, go for other investments like stocks, mutual funds, etc, and you’ll have a solid financial portfolio.