9 Points you should Consider before Opening a Fixed Deposit Account
Fixed deposit is one of the most popular saving instruments in India. Fixed deposit is selected in saving portfolio of every investor by default and most of us have invested our first investment in fixed deposit. Before opening a new Fixed deposit, we should go through various factors like the mode of opening offline or FD online , tenure of Fixed deposit, interest rate, amount on maturity by using FD calculator available online.
In this post we have covered the most important points related to fixed deposits.
- 1. Mode of Opening:
A fixed deposit account can be opened easily by visiting your bank branch by filing a simple one page form. However, now banks have also begun offering the facility to open FD online also, which is very convenient as you can open new fixed deposit at a few clicks of the mouse without going anywhere. In such case, the amount will be deducted from saving bank account and maturity will be credited in your saving account directly.
- 2. Minimum and Maximum amount:
The minimum amount varies from bank to bank. If you want to open an online fixed deposit then the minimum amount is Rs 5000. If you are more comfortable opening an account by visiting a branch, in that case the minimum amount is Rs 10,000. These limits may vary from bank to bank. There is no maximum limit for fixed deposit in general by banks.
- 3. Rate of Interest:
While the rate of interest varies from bank to bank, it also depends on the tenure/ period of the fixed deposit. Shorter the period of fixed deposit, lesser the interest rate. The maximum rate of interest is generally on one to five year fixed deposit accounts. So you should plan your fixed deposit in such a way so it maximizes your return. The interest on fixed deposit is compounded quarterly means you will also get interest on interest after every three months of your investment. However some banks are compounding interest half yearly or annually basis, so you should check whether interest is compounded quarterly/half yearly/annually.
Further banks are providing higher interest rates for senior citizen ,so you can deposit some amount in your parents name,if they are senior citizens, to earn higher returns.
- 4. Period/Term of Fixed deposit:
You should plan your fixed deposit in such a way so that you can earn the maximum rate of interest and receive the money when best required. It is advisable to open the account for a longer tenure to earn more return on your investment as the rate of interest is higher on long duration. However keep in mind that if amount is withdrawn from fixed deposit before maturity date then effective interest rate will be lower. So, our advice to all is that you should bifurcate the total amount in small fixed deposits so that if money is required before maturity then interest rate of whole amount is not affected.
Example: If you want to deposited 10 lakh in fixed deposit then you should bifurcate amount in small fixed deposit of 5 lakh, two fixed deposits of 2 lakh each and one fixed deposit of one lakh . In such case if rupee one lakh is required before maturity then interest on only one lakh amount will be reduced and not on entire amount of 10 lakh.
- 5. Premature penalty:
One thing everybody should keep in mind is that if you want to withdraw the amount before the maturity date then the effective rate of interest payable to you will be lower than agreed by the bank at the time of opening the Fixed deposit. Generally, the rate of interest paid in such case is equal to the prevalent interest rate. This is applicable for the tenure for which you have kept the fixed deposit, i.e. on a premature date.
But this penalty also varies from bank to bank. So while opening a fixed deposit you should kept in mind the chances of premature withdrawal in future and penalty provision by the bank.
- 6. Withdrawal /Maturity:
On maturity date, you have following options
- Withdraw the full amount along with interest in your saving account.
- Renew the fixed deposit for original amount and withdraw the interest amount.
- Renew the fixed deposit for total maturity amount including interest for further opted period
Generally, banks provide customers the facility of automatically crediting the fixed deposit amount to customers on the respective maturity date of the account. You may select the option which is best suited to you.
- 7. Tax on interest on Fixed deposit:
Interest on Fixed deposit is taxable and added to your income and the tax will be applicable as per the slab rate. However a deduction of Rs 50000/- is available to senior citizens (age 60 or more) under section 80 TTB of Income Tax Act.
- 8. Deductions under section 80C:
You may also open fixed deposit in banks with minimum tenure of 5 years to get deduction under section 80C of income tax act up to Rs 150000 in a financial year. In such case withdrawal of funds before maturity period and loans against fixed deposit is not allowed.
- 9. TDS on Fixed deposit:
TDS on Interest on fixed deposit is applicable if interest earned from fixed deposit is more than Rs 10,000 (Rs 50000 in case of senior citizens) in a year. However, if you are not a senior citizen then you can submit 15G to your bank for non- deduction of tax on interest, if your income is less than the tax exemption limit under income tax.
A senior citizen may submit for 15H to the bank for non-deduction of TDS, if their tax liability is NIL in the current year after taking into consideration all the deductions and rebates under Income Tax.
While deciding your investment portfolio, the return maximization should not be the only criteria but one of the factors. Expectation of Higher returns leads to higher risks.In long run we should balance our investment portfolio.Fixed deposit earns a guaranteed return for you as well as a highly liquid investment. As a thumb rule, If your income falls under the lowest tax slab of 5 % up to five lakh of income or your income after deductions is less than the exemption limit of Income tax, then FD is one of the best tax-saving instruments as you will receive a guaranteed rate of return on your income. Further, if you are under higher income tax rate brackets even then you should allocate some % of your investment portfolio in fixed deposit as it will help balance your risk.