Fixed Deposit is the most popular investment in India mainly due to guaranteed returns, choice of interest pay-out frequency, liquidity, safety and ease of execution. Most retired depend on the regular interest earned from fixed deposit for their day to day expenses. Here are 13 most important things you should know before investing in Fixed Deposits:
Minimum and Maximum Deposit Limit
Most government banks including SBI have a minimum deposit limit of Rs 1,000 for creating fixed deposit. However private banks have higher limit for minimum deposit. You can avail of ICICI Bank Fixed Deposits for a minimum deposit of Rs 10,000 for General Customers and Rs 2,000 for Fixed Deposits for Minors. In case of HDFC Bank the minimum deposit amount is Rs 5,000.
There is NO maximum limit but if the deposit is above Rs 1 crore, it’s called bulk deposit and generally have higher interest rates than regular FDs. For e.g. SBI considers deposit of Rs 1 crore or more as bulk deposit and for tenure of “1 year to less than 2 years” the interest rate on regular FD is 6.40% while for bulk fixed deposit is 7.00%.
Also Read: Highest Interest Rate on Bank Fixed Deposits
Frequency of Interest Payment
By default, the fixed deposit interest is paid cumulative along with principal amount on maturity. However, if required, the interest payout frequency can be changed to either monthly, quarterly or annually for regular income. This interest rate would be slightly discounted for monthly payout to account for monthly compounding.
Also Read: 13 Investments to Generate Regular Income
If not stated, the default compounding for all bank fixed deposit happens quarterly.
Just to let you know the difference, if the advertised interest rate is 8% and you deposit Rs 1 Lakh for 1 year following would be your interest based on different compounding frequency:
- Daily: Rs 8,328
- Monthly: Rs 8,300
- Quarterly: Rs 8,243 (this is what banks pay)
- Half-Yearly: Rs 8,160
- Annually: Rs 8,000
Most banks offer extra interest of 0.25% to 0.75% for senior citizens. SBI, PNB, ICICI Bank etc pay 0.5% extra interest rate to senior citizens. Senior citizens means person who is above the age of 60 years on the day of opening FD.
Most banks also give additional interest rate for its employee and ex-employees. ICICI bank staff (including retired staff) gets additional 1% rate of interest on domestic deposit below Rs 1 Crore.
SBI too gives 1% higher interest to its staff and retired staff. The good thing is the retired staff (who is above 60 years of age and resident Indian) gets benefit of both staff & senior citizens rate and hence gets 1.5% higher rates than regular depositors.
The tenure for most bank fixed deposit varies from 7 days to 10 years. However, two banks – IDBI bank and Ratnakar bank do offer tenure of 20 years. In case of IDBI bank the 20 year deposit can only be done with regular payout option and not cumulative.
On the other hand most foreign banks like Citibank, Standard Charted, Deutsche Bank have maximum tenure of 5 years only.
Also Read: 21 Hidden Charges in Saving Bank Account
After FD Maturity
When you open fixed deposit online or offline you need to give instructions on what to do on maturity. There are 3 options to choose from:
- Credit both Principal and interest in your account
- Credit interest in your account and reinvest the principal in FD
- Reinvest both Principal and interest
In case you do not give any instructions, on maturity the fixed deposit is renewed automatically. You can also change the maturity instructions mid-way before maturity.
Penalty on Premature Withdrawal of FD
In case you break your fixed deposit before completion of tenure, most banks levy penalty. This varies between bank to bank and can be waived off under certain circumstances. Some banks may also choose to waive off the penalty if you are reinvesting the amount in the same bank (happens when there is rise in interest rates).
- For Retail Term Deposit up to Rs 5.00 lacs, the penalty for premature withdrawal will be 0.50% (all tenors).
- For Retail Term Deposits above Rs 5.00 lacs but below Rs 1 crore, applicable penalty will be 1% (all tenors).
However, no interest will be paid on Deposits which remain for a period of less than 7 days.
Looking at the above condition it may be good idea to break your deposits in Rs 5 lakh in case you have little possibility of premature withdrawal.
ICICI Bank levies penalty of 0.5% if the deposit tenure is less than 1 year and 1% if the tenure is more than 1 year.
Axis Bank, Bank of India, DCB Bank, Dena Bank, IDBI Bank, Yes Bank and some other banks do not have penalty on premature withdrawal. Remember these conditions keep on changing hence you must look at the same while opening your fixed deposit accounts.
FD Partial Withdrawal
Some banks allow you to break the FD partially. This means if you have FD of Rs 5 lakh but require Rs 1 Lakh, the bank would break only Rs 1 lakh and keep Rs 4 lakh in FD with original terms and conditions. For e.g. ICICI Bank permits partial withdrawal in units of Rs 1,000.
This is a very good feature and provides liquidity.
Loan/Overdraft against FD
You can easily get loan against your fixed deposit, which is generally in the form of overdraft facility. For e.g. SBI gives loan of 90% of the Principal deposit whereas ICICI gives loan up to 90% of principal and accrued interest. The interest rate charged is just around 2% to 3% more than the FD interest rate. This can be very useful when you need money urgently for short time. Breaking of FD might not be good solution due to penalty and so loan may come-in handy.
In case you want credit card and not getting one due to poor credit score or low income you can get credit card backed by fixed deposit.
Nomination Facility in FD
All fixed deposits have nomination facility which you must use. Also, even if you have multiple fixed deposits in a bank, you can nominate different people in different FDs in the same bank.
TDS (Tax Deduction at Source)
TDS is applicable at the rate of 10% if the annual interest accrued is more than Rs 40,000 for general public (changed from Rs 10,000 limit in Budget 2019) and Rs 50,000 for Senior Citizens (changed in Budget 2018 and applicable from April 1, 2018). The TDS is deducted and deposited with income tax department every quarter from the interest accrued.
TDS @ 20% is deducted in case the depositor fails to provide PAN card information at the time of applying or opening the FD account
In case your annual income is less than the income tax limit (Rs 2.5 Lakh for FY 2019-20) you can submit Form 15G or Form 15H to avoid TDS.
Tax on Fixed Deposit
The interest income from FD is considered as “Income from Other Sources” for filing income tax return. The interest income is taxed at the income tax rate applicable to you. So for people in 30% tax bracket, he would need to pay additional tax as TDS was only 10%. In case of the FD is on joint name, the tax liability lies with the first holder.
Also, if you have received large amount of interest, you might have to pay advance tax.
You can lose money in Fixed Deposit
Most people think that FD is safe and secure and you cannot loose money. This is not true. Do you know what happens if the bank which has your FD closes down? I understand that you may not have heard much about closing down of banks but a few cooperative banks close down every year in India due to irregularities and many people lose money.
Fixed Deposits that you keep with the banks are insured by DICGC (Deposit Insurance and Credit Guarantee Corporation) but this doesn’t mean that you’re insured entirely. The insurance provided by DICGC is limited to Rs1 lakh per bank account holder across all the branches of such bank. This means that if the bank shuts down you would only get Rs 1 lakh through this insurance. Therefore, its recommended to invest in larger banks or government owned banks. Small co-operative banks are most risky and invest with them only if you are confident about it.
Tax saving FD
There is special category of fixed deposit which can be used to save tax under section 80C. The tenure of tax saving FD is 5 years or more. There are some restrictions like you cannot break this FD prematurely or take loan against the same.
As we had stated Fixed Deposits are popular investment in India mainly due to guaranteed returns, choice of interest pay-out frequency, liquidity, safety and ease of execution. The above points would help you understand the fixed deposits better enabling you to take more informed investment decision.