5 things to consider before investing in FD

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Today, almost all banks offer Fixed Deposit account service as a lucrative investment option. Owing to its stable returns and lower risk, it is one of the most popular choices for investment.

Since, many banks offer this option, it is important to know how to judge which one is better.

In this article, we will tell you the 5 most important things to consider while parking your money in a Fixed Deposit.

  1. Tenure
  2. Interest Rate
  3. Tax Deducted at Source (TDS)
  4. Interest Payout Frequency
  5. Senior Citizen Offer

1. Tenure

Before investing in Fixed Deposit, carefully decide the duration of your deposit. The duration can be for a period of 7 days to 10 years. It is important that you decide the tenure of the deposit carefully, since, there is a penalty on premature withdrawal which lowers the overall interest earned on your deposit.

If you anticipate that there can be a need for funds in the foreseeable future then you make the deposit accordingly i.e. if you think that you might need money after 2 years then you make an FD for 2 years and not for 5 years. Since, if you get an FD for 5 years and then break after 2 years then you will end up losing interest due to the premature withdrawal penalty.

And if you are uncertain about the needs of funds then it is advisable that you park your money in multiple FDs with varying tenure. Such that one matures approximately after 1 or 2 year and other matures after a longer duration say, 5 years.

So, if you need funds around at that time, you can use the maturity amount and can save on the premature withdrawal penalty. And in case you don’t need the funds, you can further reinvest the maturity amount. And since you will have multiple FDs, the ones with longer duration won’t have to be broken.

2. Interest

The RBI issues the guidelines with respect to the rate of interest that the banks can offer. Within the limits prescribed, the banks have the autonomy to decide the interest rates. Therefore, Interest rate offered on Fixed Deposit varies from bank to bank but very few people know that it also varies according to the tenure of the deposit.

To get the best interest rates, refer to the entire interest rate chart offered by the bank for various tenures. At times, the banks offer a higher rate of interest when you add a few days or months to the standard duration. It varies from bank to bank. You can use the FD interest calculator to choose the best option applicable for you.

For instance, in Axis Bank if you book an FD for 11 months the rate of interest is 6.5%, however, if you book it for 13 months the interest rate is 6.75%. Thus, by adding just 1 month to 1 year of FD the interest increases by 0.25%.

3. Tax Deducted at Source (TDS)

The interest earned on FD is subject to Income Tax. If the interest earned on the Fixed Deposit exceeds Rs. 10,000 in one financial year, then the entire interest earned becomes taxable and is subject to TDS deduction. It means that when the interest exceeds Rs. 10,000, the bank will deduct 10% of the interest earned and then credit the balance.

However, if you do not fall in the tax bracket, i.e. you do not have taxable income or if such interest income when added to your other income does not exceed the maximum amount not chargeable to tax, then you can submit the Form 15G/H. This form is a declaration that your total income for the year is not chargeable to tax. Upon submission of this form to the bank, it will not deduct the TDS on the interest earned, when it exceeds Rs. 10,000.

4. Interest Payout Frequency

If you are looking at a regular income from the interest earned on Fixed Deposit then you should check the bank’s policy with respect to the withdrawal of interest. Earlier banks used to offer quarterly and annual withdrawal of interest. However, now the banks also offer monthly interest payouts.

So, if you want a stable income from the interest earned on Fixed Deposit, then the bank’s policy with regards to the interest payout must be considered.

5. Senior Citizen Offer

The interest rates for Fixed Deposit is different for senior citizens and other than senior citizens. The rates offered to senior citizens is usually higher. Therefore, if you are a senior citizen yourself, or if you have somebody in the family who classifies as a senior citizen, then you can avail the benefit of higher interest under the Senior Citizen offer. It will help you earn more interest.

These are some of the things that should be considered while parking your money in Fixed Deposit. It will help you make a better decision while opening a Fixed Deposit online that suits your needs.

Karan is CA by Qualification with the rare distinction of being awarded All India Rank 22. He is also the founder of this website and loves to help people with their Tax Queries.