A fixed deposit is a great investment opportunity for anybody who wants to put their money to work. It comes with minimal risks and good returns. A fixed deposit is simple, unlike equity and mutual fund investment. You only have to open a fixed deposit account with a bank and deposit a lump sum. The bank keeps your money for a specific period, which can last for 1-5 years and longer. The bank returns the principal amount with interest upon maturity of the FD.
Most banks offer fixed deposit schemes, which allow investors to grow their wealth without any risk. So, are you planning to open an FD account? Here’s a guide to picking the right fixed deposit.
Check Interest First
The interest rate on fixed deposits in India varies from bank to bank. It can be only 4% on your principal amount, or up to 9% p.a. Banks pay the interest periodically or at maturity.
Higher interest rates on FD means you will make more money over time. That’s why you must take some time to research the interest rates charged by different banks.
The term of the FD also affects the interest rates. If you choose a longer tenure, you will get a higher interest rate. Usually, senior citizens get FDs at higher interest rates.
Choose a Tenure
Tenure is the term of the FD or a period until which the bank uses your money.
Banks offer flexible tenure on fixed deposits. You can choose a short or long term – whatever suits your needs. A long tenure is a good option if you want maximum returns. By keeping your money with the bank for a longer period, you can maximize your return on investment.
However, if you think you will need the money earlier, consider short-term FDs. For example, you can withdraw money from the fixed deposit account in 12 months (if you choose an FD with 1-year tenure).
Check the Premature Withdrawal Rules
Note that you cannot withdraw your money before maturity. The bank charges an early withdrawal penalty to those who withdraw money from FDs before the due date. Most banks have restricted the withdrawals within three months of opening an FD account. They charge you a premature withdrawal penalty if you withdraw money before maturity.
The penalty varies from bank to bank. It’s best to check the premature withdrawal penalty rules before investing in a fixed deposit. Some banks have more flexible conditions for early withdrawals than others.
Another benefit of a fixed deposit is that the interest earned from this investment is tax-deductible. This means it lowers your taxable income. However, the interest is considered tax-deductible only if it exceeds Rs. 10,000 a year.
Interest earned from fixed deposits is subject to TDS (tax deducted at source). To avoid TDS deduction, you must fill and submit Form 15G to the lender. If you are a senior citizen, submit Form 15H to the bank.