Investment in fixed deposits is one of the traditional sectors of parking your earnings for future endeavors. Offering a steady ROI and tax benefits, most people find it a safe and hassle-free investment.
Things are not the same because of COVID-19 because financial institutions have slashed FD returns. Although the SENSEX is comfortably trading past 57k (it slipped to 26k during March-April, 2020), here’s what you should value before opening a new fixed deposit account.
- Fixed deposits
Your deposit gets fixed (withdrawal before maturation attracts a penalty). Before running after attractive ROI, decide the principal you can afford to invest considering sudden financial woes. There’s no flexibility like recurring deposits (pay entire principal at once). When investing in FDs, don’t consider the sum for future spending until maturation.
- Types of fixed deposits
While opening a new fixed deposit account, you get to choose between cumulative and non-cumulative deposits. Under cumulative FD, expect ROI payment post-maturation of FD. While non-cumulative FDs offer (monthly/quarterly/yearly) payments. The former is best suited for investment, while the latter is popular amongst pensioners and senior citizens.
- Calculate FD
Use this FD calculator to figure your total returns based on ROI, timeline, and principal investment.
A = P * (1 + r/n)^(n*t)
A = Net amount at maturity
P = Invested amount
r = ROI per annum
n = Frequency of compounding
t = Maturity timeline (months)
Earn a net amount worth 1,19,801 with an investment of 1,00,000 for 36-months for 6.6% ROI per annum.
- ROI matters
FD Rates in India vary between 2.5%-8.05% per annum. These rates vary based on invested amount, timeline, and age limit. For young citizens, the highest FD ROI is 5.5%, while senior citizens enjoy an additional ROI of up to 3%.
- FD Timeline
I5t is possible to open your fixed deposit account for 2-weeks to 10-years. The volatility index is higher for small timeline investments, and hence, the ROI is comparatively low. Earn up to 2.5% investing in FD for 14-days. The maximum tenure for FD is 10-years, and you can earn a flat 8% ROI per annum.
- Deposit limits
Government financial institutions offer FD investment at a minimum of INR 1000. Private institutions offering higher ROI require higher minimum deposits, starting from INR 5000. FD accounts don’t have any maximum deposit limits and prefer cashless transactions over 50,000 INR.
- Safety first
The government guarantees investment security up to 5 lakhs/customer/bank. A 100% money return guarantee even if bankruptcy happens. Uniformly place your money across financial institutions to earn a better ROI on your fixed deposit account. There’s no limit to opening FDs against a single PAN.
- Tax benefits and deduction
FD is a popular choice to enjoy additional tax benefits. Yet FD returns are taxable as per your annual income slab. Here are the after-tax returns on FD Rates in India worth 7.5% per annum:
- 7% (per annum income up to 5 lakhs)
- 5.94% (per annum income between 5 lakhs to 10 lakhs)
- 5.16% (per annum income over 10-lakhs)
- Loan against FD
Having an FD allows you to avail loan using it as collateral. Most people use it as a last resort to make up for emergency expenses. You can get a loan up to 90% of the FD amount at nominal charges (adjustable with a deduction from your FD rates worth 1-2% per annum).
- Premature withdrawal of FD
Financial organizations usually discourage the premature withdrawal of an FD. You can receive a penalty nearing 1% on the total amount valued to date. That said, some banks offering fixed deposit account have a policy allowing premature withdrawal for an emergency.
Never fall for that 8% flat ROI FD tagline! FD Rates in India offer generous returns and tax benefits. It’s vital to find the most suitable financial institution based on ROI, timeline, and flexibility on offer.
While government institutions may offer ROI less by 0.5-1% than private lenders, the former assures guarantee while private players may lure you with higher returns in less time.