FIXED DEPOSIT

Fixed Deposit Accounts

1. Fixed Deposit Accounts Introduction and Definition Who can Opens Interest Tax Deduction and Contains Early Withdrawal and Renewal Maturity Renewal of Overdue Deposits Advance on Fixed Deposits Joint Holding and loss of receipt Repayment and Recurring Deposit Deceased Depositor Deposit of Deceased DepositorFixed Deposit Accounts Retail Banking Chapter 06

2. Introduction and Definition Fixed deposits are deposits placed with the bank for fixedperiod. It is repayable on the expiry of that period, the rate ofinterest offered to these are higher than on savings accounts. Theminimum period of such deposit may be placed is 7 days, whereasthe maximum period is 120 months. If there is court order in caseof minors, the same period can be extended. The interest rate ondeposits are fixed by bank. Before 1992 it was stipulated byR.B.I. The term “Fixed Deposit” is define as, “a depositreceived by a bank for a fixed period and which is withdrawableonly after expiry of the said period and shall also include depositssuch as, recurring, cumulative, annuity, cash certificates etc. Fixed Deposit Accounts Retail Banking Chapter 06

3. Who can Opens Those who have funds in hand can open fixed depositaccount. These include : -Individuals -Sole Proprietorships -Hindu Undivided Families (HUF) -Partnerships -Trusts -Associations / Societies and Clubs -Limited Companies Fixed Deposit Accounts Retail Banking Chapter 06

4. Interest The study of interest paid on fixed deposit can besummarised in points as below; -Banks are now free to determine the rate of interest. -Banks may offer deposit on a floating rate -Interest should be paid at quarterly or longer rests. -Interest is calculated on the daily balance. -Interest on deposit of less than 3 months or where thequarter is incomplete, interest should be paid on the number ofdays reckoning the year at 365 days. Fixed Deposit Accounts Retail Banking Chapter 06

5. Interest -Interest is credited only if it is one rupee or more. -Scheduled bank with deposits of less than Rs.25 Crores arepermitted to give an additional ½% of interest. -All transactions including the payment of interest should berounded off to the nearest rupee. -Additional interest of 1% is also payable to retiredemployee (not resigned) and the spouse of a deceased retiredemployee. Fixed Deposit Accounts Retail Banking Chapter 06

6. Tax Deduction and Contains Where the interest paid per individual in excess ofRs.10,000/-, bank has to deduct tax at source if the depositor hasnot submitted Form 15H or 15G or certificate u/s 197(1) of theIncome tax Act,1961. The main contents of Fixed Deposit Receipt are; – Date of issue – Due date – Amount – Rate of interest – Period of deposit – Amount of maturity. Fixed Deposit Accounts Retail Banking Chapter 06

7. Early Withdrawal and Renewal Sometimes a depositor may want to encash his deposit beforematurity. Bank should permit early withdrawal. The R.B.I. states thatpenal interest should not be charged if the deposit is reinvested in afresh deposit immediately. Banks may at their discretion, disallowpremature withdrawal of large deposits held by entities other thanindividuals and HUF. This

is possible if depositor have been soadvised at the time of the account was opened. In case of renewal, the deposits are renewed on maturity onthe request of the depositor. Interest on renewal will be;On the original deposit at the rate applicable to the period for whichthe deposit has actually run.Interest for the period from the date of renewal will be allowed at therate prevailing on the date of renewal. Fixed Deposit Accounts Retail Banking Chapter 06

8. Maturity The deposit is said to be matured when the period forwhich it has been placed is over. On maturity the depositor mustinstruct bank to renew if he wants so. Bank at their own cannotdo so. If the depositor neither renew nor claim the depositamount, such deposits will be designated as an,” overdue deposit”in the books of bank. If the depositor does not make a demand,bank cannot close the deposit and repay the depositor. If thedepositor does not want to renew it, he can ask for it to be paid tohim either by crossed cheque/draft6 or just credited to his accountwith the bank. Fixed Deposit Accounts Retail Banking Chapter 06

9. Renewal of Overdue Deposits The aspects concerning renewal of overdue deposit may bedecided by banks laying down a transparent policy which is non-discretionary and non-discriminatory. This should be notified tocustomer at the time of opening account. If the application forrenewal is made after 14 days the rate of interest should be therate prevailing on the date of renewal of deposit. Banks are freeto determine the rate of interest between the date of maturity andthe date of renewal. Fixed Deposit Accounts Retail Banking Chapter 06

10. Advance on Fixed Deposits Banks may grant loans on the security of the Fixeddeposit. The decision in regards to margin is left to the individualbank. On the advances given on the security of fixed deposits tothird parties upto Rs.2Lakhs banks can charge interest withoutreference to its BPLR. If it exceeds Rs.2Lakhs,it should be at therates prescribed by the R.B.I. All transaction should be rounded tothe nearest rupee. Cheque issued by the customers containingfractions of a rupee should not be rejected or dishonored. Fixed Deposit Accounts Retail Banking Chapter 06

11. Joint Holding and loss of receipt As in case of sawing account, fixed deposit account alsomay be in the joint names of two or more persons. But in jointholding, if one of the holder make request of prematurewithdrawal, the same should be done only after getting consent ofthe other depositor. This rule also applies to loans and otherrequests against the same deposits. The fixed deposit receipt is neither negotiable nor is ittransferable. If the same is lost, customer will ask for a duplicate.The duplicate receipt is necessary because at the time of maturingand repayment all banks wants the original receipt for dischargeand surrendered. To obtain duplicate receipt depositor shouldrequest in writing and execute a letter of indemnity Fixed Deposit Accounts Retail Banking Chapter 06

12. Repayment and Recurring Deposit The repayment of deposit must be made by account payeecheque if the amount of deposit along with interest is above20,000/-. The payment can also be made by crediting thesaving/current account of the depositor. In case of joint holding,the repayment is usually made in the name of the first person. Abanking cash transaction tax is applicable if individual or HUFwithdraw Rs.1,00,000/- for companies or other bodies. A variant is the recurring or cumulative deposit. Depositcan save a recurring amount every month for the period selected.If the depositor closes his account within three months, nointerest is paid. Fixed Deposit Accounts Retail Banking Chapter 06

13. Deceased Depositor When a depositor has utilised facility of nomination oraccount is opened with survivor clause, payment of balance in theaccount to nominee or survivor is valid if;1.Bank has exercise due care in establishing identity of survivor2.There is no court order restraining bank for payment etc. Where deceased depositor has not made any nomination;banks are expected to follow simple procedure for repayment tolegal heirs without inconveniencing them. Fixed Deposit Accounts Retail Banking Chapter 06

14. Deposit of Deceased Depositor A term deposit with interest becomes payable on maturityto the heir/legal representative at a deceased depositor. If thedeath takes place before maturity and the deposit is claimed afterthe maturity; interest is to be paid at the contracted rate uptomaturity and then saving account rate. the RBI has asked banksto incorporate a clause in the account opening form to the effectthat in the event of the death of the depositor, prematuretermination of such deposit would be deposit would be allowed.this would not attract and penal charges. Fixed Deposit Accounts Retail Banking Chapter 06

15. Prohibitions• No brokerage in the form of commission or gifts should be paidto collect the deposit.•Gift in excess of Rs.250/- should not be given.•No incentive should be given as price for deposit mobilizationschemes.•No advances should be given on fixed deposits of the otherbanks•No lunch/lottery/free trips oriented deposit scheme can belaunched.•Adverts can not be issued highlighting compounded interestwithout indicating actual simple interest.•Banks can not prematurely repay the term deposit of theircustomers on their own. Fixed Deposit Accounts Retail Banking Chapter 06

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A fixed deposit (FD) is a financial instrument provided by banks which provides investors with

a higher rate of interest than a regular savings account, until the given maturity date. It may or

may not require the creation of a separate account. It is known as a term deposit or time deposit

in Canada, Australia, New Zealand, and the US, and as a bond in the United Kingdom. They are

considered to be very safe investments. Term deposits in India is used to denote a larger class of

investments with varying levels of liquidity. The defining criteria for a fixed deposit is that the

money cannot be withdrawn for the FD as compared to a recurring deposit or a demand deposit

before maturity. Some banks may a offer additional services to FD holders such as loans against

FD certificates at competitive interest rates. It's important to note that banks may offer lesser

interest rates under uncertain economic conditions. The interest rate varies between 4 and 11

percent.[1] The tenure of an FD can vary from 7, 15 or 45 days to 1.5 years and can be as high as

10 years.[2] These investments are safer than Post Office Schemes as they are covered by the

Deposit Insurance and Credit Guarantee Corporation (DICGC). However, DICGC guarantees

amount up to ₹ 1,00,000 (about US$ 1600) per depositor per bank.[3] They also offer income tax

and wealth tax benefits.

Explanation

Fixed deposits are a high-interest-yielding Term deposit and offered by banks in India. The most

popular form of Term deposits are Fixed Deposits, while other forms of term Deposits are

Recurring Deposit and Flexi Fixed Deposits (the latter is actually a combination of Demand

deposit and Fixed deposit).

To compensate for the low liquidity, FDs offer higher rates of interest than saving accounts. The

longest permissible term for FDs is 10 years. Generally, the longer the term of deposit, higher is

the rate of interest but a bank may offer lower rate of interest for a longer period if it expects

interest rates, at which the Central Bank of a nation lends to banks ("repo rates"), will dip in the

future.[4]

Usually in India the interest on FDs is paid every three months from the date of the deposit. (e.g.

if FD a/c was opened on 15th Feb., first interest instalment would be paid on 15 May). The

interest is credited to the customers' Savings bank account or sent to them by cheque. This is a

Simple FD.[5] The customer may choose to have the interest reinvested in the FD account. In this

case, the deposit is called the Cumulative FD or compound interest FD. For such deposits, the

interest is paid with the invested amount on maturity of the deposit at the end of the term.[6]

Although banks can refuse to repay FDs before the expiry of the deposit, they generally don't.

This is known as a premature withdrawal. In such cases, interest is paid at the rate applicable at

the time of withdrawal. For example, a deposit is made for 5 years at 8%, but is withdrawn after

2 years. If the rate applicable on the date of deposit for 2 years is 5 per cent, the interest will be

paid at 5 per cent. Banks can charge a penalty for premature withdrawal.[5]

Banks issue a separate receipt for every FD because each deposit is treated as a distinct contract.

This receipt is known as the Fixed Deposit Receipt (FDR), that has to be surrendered to the bank

at the time of renewal or encashment.[7]

Many banks offer the facility of automatic renewal of FDs where the customers do give new

instructions for the matured deposit. On the date of maturity, such deposits are renewed for a

similar term as that of the original deposit at the rate prevailing on the date of renewal.

Income tax regulations require that FD maturity proceeds exceeding Rs 20,000 not to be paid in

cash. Repayment of such and larger deposits has to be either by " A/c payee " crossed cheque in

the name of the customer or by credit to the saving bank a/c or current a/c of the customer.

Now a days, banks gives the facility of Flexi or sweep in FD, where in you can withdraw your

money through ATM, through cheque or through funds transfer from your FD account. In such

case, whatever interest is accrued on the amount you have withdrawn will be credited to your

savings account (the account that has been linked to your FD) and the balance amount will

automatically be converted in your new FD. This system helps you in getting your funds from

your FD account at the times of emergency without wasting your time.

Some Benefits of FD

Customers can avail loans against FDs up to 80 to 90 per cent of the value of deposits.

The rate of interest on the loan could be 1 to 2 per cent over the rate offered on the

deposit and.[8]

Resident of India can open these accounts for a minimum 3 months.

Taxability

Tax is deducted by the banks on FDs if interest paid to a customer at any bank exceeds Rs.

10,000 in a financial year. This is applicable to both interest payable or reinvested per customer.

This is called Tax deducted at Source and is presently fixed at 10% of the interest. With CBS

banks can tally FD holding of a customer across various branches and TDS is applied if interest

exceeds Rs 10,000. Banks issue Form 16 A every quarter to the customer, as a receipt for Tax

Deducted at Source.[9]

However, tax on interest from fixed deposits is not 10%; it is applicable at the rate of tax slab of

the deposit holder. If any tax on Fixed Deposit interest is due after TDS, the holder is expected to

declare it in Income Tax returns and pay it by himself.

If the total income for a year does not fall within the overall taxable limits, customers can submit

a Form 15 G (below 60 years of age) or Form 15 H (above 60 years of age) to the bank when

starting the FD and at the start of every financial year to avoid TDS.

How bank FD rates of interest vary with Central Bank policy

In certain macroeconomic conditions (particularly during periods of high inflation) a Central

Bank adopts a tight monetary policy, that is, it hikes the interest rates at which it lends to banks

("repo rates"). Under such conditions, banks also hike both their lending (i.e. loan) as well as

deposit (FD) rates. Under such conditions of high FD rates, FDs become an attractive investment

avenue as they offer good returns and are almost completely secure with no risk

eaning of Fixed Deposit Account - Bank ↓

The account which is opened for a particular fixed period (time) by depositing particular amount

(money) is known as Fixed (Term) Deposit Account.

The term 'fixed deposit' means that the deposit is fixed and is repayable only after a specific

period is over.

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Under fixed deposit account, money is deposited for a fixed period say six months, one year,

five years or even ten years. The money deposited in this account can not be withdrawn before

the expiry of period.

The rate of interest paid for fixed deposit vary (changes) according to amount, period and from

bank to bank.

Features of Fixed Deposit Account ↓

The main features of fixed deposit account are as follows:-

1. The main purpose of fixed deposit account is to enable the individuals to earn a higher

rate of interest on their surplus funds (extra money).

2. The amount can be deposited only once. For further such deposits, separate accounts

need to be opened.

3. The period of fixed deposits range between 15 days to 10 years.

4. A high interest rate is paid on fixed deposits. The rate of interest may vary as per

amount, period and from bank to bank.

5. Withdrawals are not allowed. However, in case of emergency, banks allow to close the

fixed account prior to maturity date. In such cases, the bank deducts 1% (deduction

percentage many vary) from the interest payable as on that date.

6. The depositor is given a fixed deposit receipt, which depositor has to produce at the time

of maturity. The deposit can be renewed for a further period.

Advantages of Fixed Deposit Account ↓

The advantages of fixed deposit account are as follows:-

1. Fixed deposit encourages savings habit for a longer period of time..

2. Fixed deposit account enables the depositor to earn a high interest rate.

3. The depositor can get loan facility from the bank.

4. On maturity the amount can be used to make purchases of assets.

5. The bank can get the funds for a longer period of time.

6. The bank can lend such funds for short term loans to businessmen.

7. Fixed deposits indirectly boost economic development of the country.

8. The bank can also invest such funds in profitable areas.

9. Nature and characteristics of fixed deposits?

10. Depository institution (such as a bank, credit union, or a finance or insurance company)

account that pays higher than savings account interest rates but imposes conditions on the

amount , frequency , and/or period of withdrawals with the understanding that the

customer can withdraw only by giving advanced notice. A certificate of deposit (CD) is

normally issued for fixed deposits. A Fixed Deposit, also called Term Deposit, is an

investment route that provides a regular stream of income for investors, very appealing to

conservative, low-risk investors. Fixed deposits involve investing a particular sum of

money with a bank or a financial institution or even a company; this investment is in the

form of debt. There is a particular rate of interest that is paid on these fixed deposits for a

specified period of time. At the end of the specified time period, the interest payment

ceases and the original amount that is invested is returned to the investor. Looking at the

nature of the investment, this is a route that is suitable for all those who prefer keeping

their investments safe and secure. The other reason for selecting a fixed deposit over

other investment routes is to generate a regular income from the investment, which

provides an element of stability to the money invested. There are several features of a

fixed deposit that set it apart from various other investment options present in the market.

These features determine the nature of the entire investment and how it will behave under

different circumstances. Here are important features that need attention: 1. Debt

investment A fixed deposit is a debt investment. This means the amount is invested with

the feature considering that this will be returned to the investor once the specified time

period is over. This is different from an equity investment where there is a chance of a

risk with regard to the amount invested because the investor becomes the owner of the

company. In case of a fixed deposit, the investor is only lending the money to the bank or

the institution. 2. Lender The investor who buys a fixed deposit takes on the role of a

lender in the entire transaction. In this case, the bank or financial institution taking the

money is the borrower. Once the position of the lender is established, it means that the

bank has to pay back the amount that has been borrowed from the investor. In that sense

there is a responsibility of the bank to return the money to the investor. This also impacts

the feature of the investment, which underlines that there is meant to be safety of the

capital invested unlike an equity investment where even this might be lost. 3. Specified

interest There is a return that is earned by the investor when he/she gives a fixed deposit

to the bank. The return here is measured by using the term 'interest'. Interest is nothing

but the amount calculated at a specified rate of return on the amount invested. There is an

element of surety for the investor because the person knows the interest rate at the time of

making the deposit itself and due to this reason he/she also knows the amount of money

that will be earned from the investment. The important thing is that even if economic

conditions are very good or very bad the investor will keep earning the same rate of

interest, so this becomes like a fixed figure that is earned by the investor. 4. Time of

repayment Another important feature of the fixed deposit is that the investment is for a

specified period of time that is already known to the investor at the time of making the

investment. At the end of the specified period, the investment will come to an end and the

amount will be returned to the investor. This means that the investor knows the return for

the specified time and hence he/she is able to know precisely what he/she is earning and

also how the cash flow will be present in the future. Investing in a fixed deposit There are

several options available when it comes to where to make a fixed deposit. One of the

most common areas where a fixed deposit is offered is the banks. All types of banks, be

they public sector or private sector or even co-operative banks, offer fixed deposits for

their customers. This makes fixed deposits one of the most accessible options for

investors because of the fact that most people have a bank account at some place or the

other. The second option for investing in a fixed deposit is with a financial institution.

There are several institutions that offer a deposit option. This can include housing finance

institutions or even other lending institutions that offer deposits as a means of raising

funds for their activities. It can also include various non-banking finance companies that

are trying to raise funds through the route of deposits so that they can tap a larger investor

base for their fund requirements. There is one more area where fixed deposits are offered;

these are the companies that seek to raise funds through this route. Various companies

from the manufacturing to the service sector need funds for financing their various

activities and they raise money through the route of company fixed deposits. The features

of all these deposits are the same; the only difference is being the entity that is issuing the

deposit, so there will be a difference in the risk element for the investor in these deposits.

Risk element in a fixed deposit Most people believe that because a particular investment

is in a debt instrument there is no risk involved in the entire process. This is not true

because every investment involves some kind of risk. In the case of fixed deposits, the

risk is in the form of credit risk which arises when the institution that has borrowed the

money is not being able to repay the amount because of its poor financial position. The

risk element for various types of institutions is different. In case of banks, there can be a

situation where a bank becomes insolvent and hence cannot repay the deposits. The

amount recovered will depend upon the individual position of the bank involved. In case

of other financial institutions as well as companies, there is also the same risk that the

interest and the capital amount will not be repaid because of the poor financial condition

of the borrower. In this situation, there is little that the investor can do because there is no

guarantee present from any source and the loss, if any, will have to be completely borne

by the investor. There have been several such cases of defaults by companies in the past.

A fixed deposit is an investment route that provides a regular stream of income for investors.

Fixed deposits involve investing a particular sum of money with a bank or a financial institution

or even a company; this investment is in the form of debt. There is a particular rate of interest

that is paid on these fixed deposits for a specified period of time. At the end of the specified time

period, the interest payment ceases and the original amount that is invested is returned to the

investor. Looking at the nature of the investment, this is a route that is suitable for all those who

prefer keeping their investments safe and secure. The other reason for selecting a fixed deposit

over other investment routes is to generate a regular income from the investment, which provides

an element of stability to the money invested.

Best fixed deposit schemes in india

fixed deposit schemes for various durations. It offers simple reinvestment Fixed Deposits (at

very competitive interest rates), which can be opened with a minimum investment of Rs 10,000.

You can make additions to your deposit in multiples of Re 1 thereafter. The tenure of your fixed

term deposit must be a minimum of 6 months.

Fixed Deposit Schemes

Reinvestment Deposits:

In a reinvestment fixed deposit scheme, the interest accrued on your deposit at the end of each

quarter is invested along with the principal. The tenure of your deposit must be a minimum of 6

months. At the end of the quarter, the interest and the principal are both rolled over, and the

interest is calculated on the total sum net of Tax Deducted at Source (TDS)

Automatic Rollover:

As a Fixed Deposit holder, you can avail of the facility for automatic rollovers on maturity (for

both the principal and interest). You can select this option in the Account Opening Document

(AOD). The options available are:

Rollover only Principal:

Only the principal amount of your fixed deposit will be rolled over. The interest will be

either credited to your designated account or paid out.

Rollover Principal and Interest accrued in Reinvestment Deposit scheme:

This will rollover both the deposit and the interest accrued for the same tenure at the

Interest Rates applicable on the maturity date.

On or before the maturity date, you can make the following changes in the rollover instructions

of the deposit:

Change in tenure

Change in maturity instructions

Change in payment instructions

Change in principal (only reduced amount)

Change rollover of Principal to rollover of Principal + Interest, or vice versa.

Withdrawals of Fixed Deposits

All encashment or withdrawals of Fixed Deposits can only be made at the branch where the

deposit was booked.

Method of calculation of interest rates on your fixed deposits

For fixed deposits with tenure of 6 months & above, interest is calculated on a quarterly

basis.

Interest earned during the previous quarter is added to the Principal for calculation of

interest. Fixed deposit interest rate on this amount is calculated every quarter.

For fixed deposits schemes with tenure of below 6 months, interest is calculated at

Simple Interest. Please note that the period of Fixed Deposit is considered in number of

days.

In the event the depositor chooses to receive the periodic interest payments on a quarterly

basis, interested is calculated and paid on quarterly rests.

Premature Encashment:

For Rupee Term Deposits of a contracted amount less than Rs 5 Crores opened/renewed

on or after May 1, 2014 (including Flexi deposits), interest rate shall be 1.00% below the

card rate, prevailing as on the date of deposit, as applicable for the period the deposit has

remained with the bank or 1.00% below the contracted rate, whichever is lower.

However, for Rupee Term Deposits closed within 14 days from the date of booking of the

deposit interest rate shall be rate applicable for the period the deposit has remained with

the bank or the contracted rate, whichever is lower.

For Rupee Term Deposits of a contracted amount of Rs 5 Crores and above, interest rate

shall be 1% below the card rate prevailing as on the date of deposit, as applicable for the

period the deposit has remained with the bank or 1% below the contracted rate,

whichever is lower. This would also be applicable on Rupee Term Deposits closed within

14 days from the date of booking of the deposit.

There would be no premature withdrawal penalty on NRE Term Deposits.

Tax at source is deducted as per the Income Tax regulations prevalent from time to time.

*For all new Reinvestment Term Deposits to be opened on and after 1st August, 2013 and all

existing Reinvestment Term Deposits that may be renewed on and after 1st August, 2013, interest

reinvested would be net of TDS and hence the maturity value would vary to that extent.

Calculation of TDS in respect of interest on Fixed Deposits

TDS in respect of interest earned on fixed deposits, is deducted on the basis of the total interest

projected on the aggregate of fixed deposits of the customer, for the financial year.

Thus, if the total projected interest in a financial year crosses the threshold limit which is

presently Rs.10,000/-, TDS is deducted proportionately from the existing fixed deposits at the

time of interest application.

This is in accordance with Section 194 A 3 (i) (a) of the Income Tax Act.

For any further clarifications, please contact the base Branch.

Fixed deposit v/s recurring deposits

Many a time’s investors get confused whether to invest in a fixed deposit or a recurring deposit

for their investment objectives. The attraction for both these instruments is the fixed returns with

safety of money invested. But when you compare the two, a fixed deposit scores higher than a

recurring deposit. Let’s see how these two products differ in the earnings and when you should

opt for them-

Features

Both FD and RD are fixed income products available from banks. On the invested amount banks

pay you a fixed interest which can be at a specific frequency till the term or on maturity. At the

end of the term, the maturity amount which is your invested capital, along with remaining or

accumulated interest is paid. Although the interest of banking products change with interest rates

scenario, in both these products once you have invested the interest rate remains same

throughout the term. In recent times the high rising rates have prompted banks to offer high

interest rates on these two instruments and so the attraction of investors has increased manifold.

Taxability

Both these products have the same taxability. The interest received from these two is is added to

your total income and taxed at your personal income tax rate. So if you are in 30% tax slab, the

interest from FD & RD will be taxed at the same rate. However, there is a difference in the

nature of tax deduction. In a fixed deposit, banks deduct TDS if the interest income in a year

exceeds Rs 10000 but there is no TDS deduction in recurring deposit. This one feature sways

investors’ interest towards RD when there is a comparison.

Where you earn more?

When you compare both these products, a fixed deposit fetches you more income than a

recurring deposit. Lets’ assume you have invested Rs 24000 in a fixed deposit at start of the year

and Rs 2000 p.m. in a recurring deposit for a year. Both these products offer you a 9% rate of

interest compounded quarterly. This is what you will earn from these two instruments: Fixed

Deposit Recurring Deposit Invested Amount (Rs) 24000 2000 p.m. Interest Rate (p.a.) 9%

compounded quarterly 9% compounded quarterly Total Interest earned in a year (Rs) 2234 1195

Total Amount after One Year (Rs) 26324 25195 Difference (Rs) 1039 As you can see, after a

year you will receive Rs 26324 in a fixed deposit while in RD you will receive Rs 25195. So the

recurring deposit earns you Rs 1039 less than a fixed deposit.. The primary reason for this

difference is that in FD you invest a lumpsum amount and so the entire money earns interest for

one year. But in a recurring deposit the first installment earns interest for 12 months period, the

second for 11 months, third for 10 months and so on. Due to this variation FD is able to fetch a

higher maturity.

When to Invest in FD & RD?

Although FD earn higher than RD, it’s not feasible for a single product to meet all your needs.

When you do not have a lumpsum to invest but can save a defined amount from your income

every month, a recurring deposit is a more viable product. With it you can achieve an objective

of regular savings for your medium term needs. But when you have a lumpsum to invest then FD

is a wiser choice. Although both these banking products appeal to all class of investors, it is more

lucrative for small investors who are mostly in lower tax slab. The less or non-taxability of

interest along with high interest payout in today’s scenario ensures a good fixed earnings for

their goals. Avail them as they will help in meeting certain objectives but do take all associated

factors into consideration.

Features

There are several features of a fixed deposit that set it apart from various other investment

options present in the market. These features determine the nature of the entire investment and

how it will behave under different circumstances. Here are the important features that need

attention:

1. Debt investment

A fixed deposit is a debt investment. This means the amount is invested with the feature

considering that this will be returned to the investor once the specified time period is over. This

is different from an equity investment where there is a chance of a risk with regard to the amount

invested because the investor becomes the owner of the company. In case of a fixed deposit, the

investor is only lending the money to the bank or the institution.

2. Lender

The investor who buys a fixed deposit takes on the role of a lender in the entire transaction. In

this case, the bank or financial institution taking the money is the borrower. Once the position of

the lender is established, it means that the bank has to pay back the amount that has been

borrowed from the investor. In that sense there is a responsibility of the bank to return the money

to the investor. This also impacts the feature of the investment, which underlines that there is

meant to be safety of the capital invested unlike an equity investment where even this might be

lost.

3. Specified interest

There is a return that is earned by the investor when he/she gives a fixed deposit to the bank. The

return here is measured by using the term ‘interest’. Interest is nothing but the amount calculated

at a specified rate of return on the amount invested. There is an element of surety for the investor

because the person knows the interest rate at the time of making the deposit itself and due to this

reason he/she also knows the amount of money that will be earned from the investment. The

important thing is that even if economic conditions are very good or very bad the investor will

keep earning the same rate of interest, so this becomes like a fixed figure that is earned by the

investor.

4. Time of repayment

Another important feature of the fixed deposit is that the investment is for a specified period of

time that is already known to the investor at the time of making the investment. At the end of the

specified period, the investment will come to an end and the amount will be returned to the

investor. This means that the investor knows the return for the specified time and hence he/she is

able to know precisely what he/she is earning and also how the cash flow will be present in the

future.

Fixed deposits in India: Benefits, drawbacks and precautions

By Neelima Shankar

           

Any investment portfolio should comprise the right mix of safe, moderate and risky investments.

While mutual funds and stocks are the favorite contenders for moderate and risky investments,

fixed deposits, government bonds etc. are considered safe investments. Fixed deposits have been

particularly popular among a large section of investors in India as a safe investment option for a

long period.

With fixed deposits or FDs as they are popularly known, a person can invest an amount for a

fixed duration. The banks provide interest rates depending on this loan amount and the tenure of

deposit. Here are the benefits, drawbacks of fixed deposits and precautions one should take

while making such investments.

Benefits

1. Safety

The fixed deposits of reputed banks and financial institutions regulated by RBI (Reserve Bank

of India) the banking regulator in India are very secure and considered as one of the safest

investment methods.

2. Regular Income

Fixed deposits earn fixed interest rates for their entire tenure, which is usually compounded

quarterly. So, those who want an income on a regular basis can invest into fixed deposits and

use the interest rate as their income. This makes a fixed deposit very popular way of investing

money for retirees.

3. Saves tax

With the directives of the income tax department stating that investment in fixed deposits up to a

maximum of Rs.100,000 for 5 years are eligible for tax deductions under section 80 C of income

tax act, fixed deposits have again become popular. Fixed deposits save tax and give high returns

on invested money.

Drawbacks

1. Lower rate of returns

While the money invested in stock markets may give you a return of 20% the fixed deposits will

yield only about 10%. So, the money grows slowly in the case of fixed deposits.

2. Taxes

The interest earned on fixed deposits is fully taxable and is added to the annual income of the

individual. Gains from stocks are considered capital gains while dividends are tax free.

3. Rising inflation can wipe out the interest benefits

The actual benefits or income from fixed deposit can be annulled by a rising inflation. Suppose

the inflation which is currently at 3 % rises to about 6%, your fixed deposit at 10% annual return

will effectively yield only(10%-6%) = 4% of return. This return would have been (10% -3%) =

7% if the rate of inflation had not changed. This can drastically eat into your fixed deposit

income.

Investing in Fixed Deposits & their tax implications

bankDeposits Vs Company Deposits

Here, as we about bank and corporate Fixed Deposit schemes , it becomes important for us to

know the difference between the two so that we can take the right decision as far as investment

in FDs are concerned. The prime difference between the two is that though corporate FDs offer

2-3 per cent higher interest rate per annum, they are not as safe as bank FDs. Bank deposits are

generally safe investments because FDs up to Rs 1 lakh are insured under the Deposit Insurance

& Credit Guarantee Scheme of India. Hence, it is important for us to ascertain the stability of the

company, its track record of giving returns. To judge this, the simple way is to keep in mind the

following points before investing in corporate FDs: What is the rating given to the company's

fixed deposit scheme? These ratings given by credit rating agencies indicate the safety of the

investments based on the number of criteria. Usually, AAA rating is considered safest. Company

is issuing the fixed deposit to raise the money for its operations. Find out the liquidity of the

company and its financial strength to repay at the time of maturity; otherwise, investors have

issues on getting back their principal amount. Also, it is important to know that where you need

to contact them to close the FD. Unlike banks, company FDs are not operated everywhere in the

country. Read the complete terms and conditions of the FD and find out whether they allow the

pre-close of the fixed deposit before the maturity. Company Fixed Deposits forms are available

through various broking agencies or directly with the companies. The minimum investment in a

Company Fixed deposit varies from company to company. Normally, the minimum investment is

Rs.5,000. For individual investors, there is no upper limit. In case of recurring deposits, the

minimum amount is normally Rs.100 per month.

Drawbacks

FDs are not 'liquid' investments. It means if you invest your money in FDs, you will not be able

to withdraw it until it matures. Generally, if you need to remove your money before the maturity,

you will be able to do so by either losing the interest that you were supposed to earn or paying

charges on it. Besides this, a particular interest rate is decided at the time of investment. If the

interest rate goes up while your money is invested, you will not be able to enjoy it on your

investment. By investing in FD, you cannot beat inflation as the returns offered on bank FDs are

still less than the rate of inflation and it may prove to be a futile investment exercise. The rate of

return mentioned in FDs is pre-tax returns and tax amount has to be deducted from it.

Tax implications

When you open a fixed deposit account in the bank, the interest paid will be taxable income and

the banker will deduct the tax at source and pay you the remaining income to your account. This

process is called as Tax Deduction at Source (TDS). The interest income earned on any FD is

taxable at the same tax slab as the customer is in. It will be added to his income in the year under

the head 'Other Income'. However, if the interest earned on FD is more than Rs 10,000 annually,

bank cut the TDS at the rate of 10 per cent. In this case, bank will also issue you a tax certificate,

which you can show at the time of filing the income tax return. However, if you have not

submitted the PAN number while opening the fixed deposit, 20% would be deducted as the TDS.

On the other hand, if the total interest amount is up to Rs.10000, bank does not deduct tax on it.

If the person is above 60, he/she can submit the Form 15H to avoid this TDS. For those, who are

below the age of 60 have to file Form 15G. For example, Mrs. X earns Rs.25000 from the

interest in a year. She doesn't have any other income and housewife. She is eligible to file the

Form 15G and give it to the bank before March 31. In this case, the tax will not be deducted from

the source. One important point is that, these forms have to be submitted in each financial year to

avoid the tax deduction. It is advisable to submit in the beginning of the year. The NRI's, who

earn interest on their NRO's account, are subject to 30% TDS.

Conclusion

A fixed deposit is best suited for those investors who want to invest a lump sum of money at a

low risk and are comfortable committing it for a fixed period of time, and earn a rate of interest

on the same.

Advantages and disadvantages

Conservative investors, most of the time, consider fixed deposit as safe instrument. But in this

falling interest rate regime, one has to consider few other options like company fixed deposit,

bonds, etc.

Here are few advantages and disadvantages one should know before locking into fixed deposits

Advantages

The major advantage of investing in Fixed Deposit is its guaranteed return.

The only reason why our parents and many in our generation also have this single concept of

investment is because of its safety features.

Also it is easy to raise a loan against your FD.

One can borrow up to 90 per cent of the FDs amount.

The next advantage is the flexible maturity date, it is for this feature that you can invest for a

time frame that is as less as 6 months to as long as 10 years or even more.

Term deposits provide a number of benefits including the following:

High interest rates for your deposit for the duration of the term.

You're assured of returns for your investment.

Compared to other types of investments (e.g. stocks, property), term deposits are so easy

to set up. There's no learning curve or lead time.

Term deposits aren't as risky as stocks or property. In fact, term deposits are one of the

safest types of investments.

You determine how long you keep your money deposited.

You have a range of terms to choose from: from one-month deposits to five or even

seven-year investments.

You can choose the frequency of your interest payments (see above).

You can have the interest paid out by cheque or straight to your bank account, or have the

funds reinvested for compounding interest.

Having the money locked away for a set duration lets you save more easily.

A low minimal investment--as low as $500.

Disadvantages

Not surprisingly, FD as an investment is less risky then this aspect is the reason why its returns

are lower compared to other investment options.

Then there is an issue of liquidity, while your money is locked up with the bank, it is not easy to

withdraw at a moment's notice.

In fact if you withdraw before the agreed duration, you will be penalised. Also, there is no tax

benefit in this investment, unlike the infrastructure bonds or the National Savings Certificate

(NSC).

So, even from a taxation point this is not the best of investment options.

erm deposits have a few drawbacks as well.

Here's the major disadvantage: you can't touch your funds during the term's duration. If

you plan to get a term deposit, you have to be very sure that you can afford to have your

savings locked away until the maturity date.

If the term deposit allows early withdrawal (not all do), you'll have to deal with penalty

charges to get your money.

If you really must get your money out (e.g. in the event of an emergency), you can cancel

the term deposit but you'll have to deal with release charges, whose cost would depend on

how much time the term had left.

Deciding on a more frequent interest payment could result in a lower rate.

Since the interest rate is fixed for the duration of the term, you wouldn't be able to take

advantage of any cash rate increases.

Term deposits provide no tax advantages.

When do I get paid interest?

Interest is normally paid at maturity for terms shorter than 12 months. But for term deposits

longer than a year, account owners can choose when they are paid the interest. The payment

frequencies are as follows: quarterly, semi-annually or annually.

7 Benefits From Having A Fixed Deposit Account

Submitted by Stanbic IBTC team on Wed, 2014/06/04 - 11:57

Do you know that one of the easier ways of making your money work for you is by investing in a

fixed deposit account? A fixed deposit account is an investment account and a type of savings

account in which money is deposited for a stated period of time and a fixed interest rate is paid at

the end of that period.

It is a safer investment option when compared to other investment types such as shares or the

money market. Opening a fixed deposit account is both quick and easy and all you have to do is

to deposit money into the account for a given period of time, for it to earn interest for you.

Below are reasons why you should open a fixed deposit account today:

1. It encourages a savings habit as the money you deposit needs to be in the account for a period

of time without you making any withdrawal.

2. Investing in a fixed deposit account earns you a higher interest rate than depositing your

money in a savings account.

3. You are assured of returns for your investment

4. The account helps to act as a fall back for your business in the event of a cash flow squeeze or

can be used to meet your future cash requirements.

5. Interest is payable at maturity; annually or monthly depending on the term you chose or you

could use the money to buy assets if you want.

6. You get to choose how long you want to invest your money in a fixed deposit account ranging

from 30 days to ten years.

7. You can choose to have more than one fixed deposit account if you want to save for different

goals.

Please note that it is important to get the tenure right while investing in a fixed deposit because,

making a premature withdrawal of your money will lead to being penalized.

Procedure of opening and operating fixed deposit account

For opening a fixed deposit account, a depositor is required to fill up

an application form in which he has to mention his own particulars,

such as name, father’s name, residential address, etc. The amount of deposit and the period for

which deposit is to be made also needs to be mentioned. He has also to give specimen of his

signature. When the bank is satisfied with the formalities, the depositor is asked to deposit the

amount. After the deposit of the amount, the bank issues a fixed deposit receipt. A fixed deposit

receipt is an acknowledgement of receipt of the sum of money specified therein. The fixed

deposit receipt mentions the amount, period, rate of interest and the amount to be paid on

maturity.

Rate of inter

est on fixed deposit.

The rate of interest and other terms and conditions regulating fixed

deposits are determined by the Reserve Bank of India for all commercial

banks. The Reserve Bank of India keeps on revising the rate of interest

from time to time. The rate of interest currently applicable on fixed

deposits are as follows.

Revised interest rates on bank fixed deposits with ef

fect from

17-1-1998.

Payment of inter

est

Though the interest is payable on the maturity of fixed deposit account,

banks may pay interest quarterly or half yearly also. In case the bank

pays interest before maturity

, the amount of such interest is transferred

to depositor

’

s saving bank account. Normally the interest on fixed

deposit is compounded in case the depositor does not withdraw the

interest. If the fixed deposit is renewed, the interest on it is also

compounded. When the depositor fails to claim the deposit on due date

and later on desires to renew the deposit, the bank may renew it from

the date of maturity

. In such a situation the depositor does not lose the

interest.

Payment of fixed deposits befor

e the date of maturity

Fixed deposits are normally payable on maturity

. In case the depositor requires the money before the due date, he or she makes a request to

the bank for its payment. The bank may consider such a request and

make payment of the fixed deposit. When the payment of fixed deposit

is made before the date of maturity

, the depositor loses interest which

is 1% less compared to the rate applicable for the period.

Advance against fixed deposits

The bank may grant loan against fixed deposit receipt. But according

to the directions of Reserve Bank of India, the rate of interest char

ged

on such a loan is to be at least 2% above the rate payable on the

deposit.

Fixed deposit in joint names

Fixed deposits may be made in the joint names of two or more persons

payable to either or survivor

.

The money on such deposit is payable to

either of them or survivor at the time of maturity

.

Who can Opens Those who have funds in hand can open fixed depositaccount. These

include : -Individuals -Sole Proprietorships -Hindu Undivided Families (HUF) -Partnerships -

Trusts -Associations / Societies and Clubs -Limited Companies Fixed Deposit Accounts Retail

Banking Chapter 06

Interest The study of interest paid on fixed deposit can besummarised in points as below; -

Banks are now free to determine the rate of interest. -Banks may offer deposit on a floating rate -

Interest should be paid at quarterly or longer rests. -Interest is calculated on the daily balance. -

Interest on deposit of less than 3 months or where thequarter is incomplete, interest should be

paid on the number ofdays reckoning the year at 365 days. Fixed Deposit Accounts Retail

Banking Chapter 06

Interest -Interest is credited only if it is one rupee or more. -Scheduled bank with deposits of

less than Rs.25 Crores arepermitted to give an additional ½% of interest. -All transactions

including the payment of interest should berounded off to the nearest rupee. -Additional interest

of 1% is also payable to retiredemployee (not resigned) and the spouse of a deceased

retiredemployee. Fixed Deposit Accounts Retail Banking Chapter 06

Tax Deduction and Contains Where the interest paid per individual in excess ofRs.10,000/-,

bank has to deduct tax at source if the depositor hasnot submitted Form 15H or 15G or certificate

u/s 197(1) of theIncome tax Act,1961. The main contents of Fixed Deposit Receipt are; – Date of

issue – Due date – Amount – Rate of interest – Period of deposit – Amount of maturity. Fixed

Deposit Accounts Retail Banking Chapter 06

Early Withdrawal and Renewal Sometimes a depositor may want to encash his deposit

beforematurity. Bank should permit early withdrawal. The R.B.I. states thatpenal interest should

not be charged if the deposit is reinvested in afresh deposit immediately. Banks may at their

discretion, disallowpremature withdrawal of large deposits held by entities other thanindividuals

and HUF. This is possible if depositor have been soadvised at the time of the account was

opened. In case of renewal, the deposits are renewed on maturity onthe request of the depositor.

Interest on renewal will be;On the original deposit at the rate applicable to the period for

whichthe deposit has actually run.Interest for the period from the date of renewal will be allowed

at therate prevailing on the date of renewal. Fixed Deposit Accounts Retail Banking Chapter 06

Maturity The deposit is said to be matured when the period forwhich it has been placed is

over. On maturity the depositor mustinstruct bank to renew if he wants so. Bank at their own

cannotdo so. If the depositor neither renew nor claim the depositamount, such deposits will be

designated as an,” overdue deposit”in the books of bank. If the depositor does not make a

demand,bank cannot close the deposit and repay the depositor. If thedepositor does not want to

renew it, he can ask for it to be paid tohim either by crossed cheque/draft6 or just credited to his

accountwith the bank. Fixed Deposit Accounts Retail Banking Chapter 06

Renewal of Overdue Deposits The aspects concerning renewal of overdue deposit may

bedecided by banks laying down a transparent policy which is non-discretionary and non-

discriminatory. This should be notified tocustomer at the time of opening account. If the

application forrenewal is made after 14 days the rate of interest should be therate prevailing on

the date of renewal of deposit. Banks are freeto determine the rate of interest between the date of

maturity andthe date of renewal. Fixed Deposit Accounts Retail Banking Chapter 06

Advance on Fixed Deposits Banks may grant loans on the security of the Fixeddeposit. The

decision in regards to margin is left to the individualbank. On the advances given on the security

of fixed deposits tothird parties upto Rs.2Lakhs banks can charge interest withoutreference to its

BPLR. If it exceeds Rs.2Lakhs,it should be at therates prescribed by the R.B.I. All transaction

should be rounded tothe nearest rupee. Cheque issued by the customers containingfractions of a

rupee should not be rejected or dishonored. Fixed Deposit Accounts Retail Banking Chapter 06

Joint Holding and loss of receipt As in case of sawing account, fixed deposit account alsomay

be in the joint names of two or more persons. But in jointholding, if one of the holder make

request of prematurewithdrawal, the same should be done only after getting consent ofthe other

depositor. This rule also applies to loans and otherrequests against the same deposits. The fixed

deposit receipt is neither negotiable nor is ittransferable. If the same is lost, customer will ask for

a duplicate.The duplicate receipt is necessary because at the time of maturingand repayment all

banks wants the original receipt for dischargeand surrendered. To obtain duplicate receipt

depositor shouldrequest in writing and execute a letter of indemnity Fixed Deposit Accounts

Retail Banking Chapter 06

Repayment and Recurring Deposit The repayment of deposit must be made by account

payeecheque if the amount of deposit along with interest is above20,000/-. The payment can also

be made by crediting thesaving/current account of the depositor. In case of joint holding,the

repayment is usually made in the name of the first person. Abanking cash transaction tax is

applicable if individual or HUFwithdraw Rs.1,00,000/- for companies or other bodies. A variant

is the recurring or cumulative deposit. Depositcan save a recurring amount every month for the

period selected.If the depositor closes his account within three months, nointerest is paid. Fixed

Deposit Accounts Retail Banking Chapter 06

Deceased Depositor When a depositor has utilised facility of nomination oraccount is opened

with survivor clause, payment of balance in theaccount to nominee or survivor is valid if;1.Bank

has exercise due care in establishing identity of survivor2.There is no court order restraining

bank for payment etc. Where deceased depositor has not made any nomination;banks are

expected to follow simple procedure for repayment tolegal heirs without inconveniencing them.

Fixed Deposit Accounts Retail Banking Chapter 06

Deposit of Deceased Depositor A term deposit with interest becomes payable on maturityto

the heir/legal representative at a deceased depositor. If thedeath takes place before maturity and

the deposit is claimed afterthe maturity; interest is to be paid at the contracted rate uptomaturity

and then saving account rate. the RBI has asked banksto incorporate a clause in the account

opening form to the effectthat in the event of the death of the depositor, prematuretermination of

such deposit would be deposit would be allowed.this would not attract and penal charges. Fixed

Deposit Accounts Retail Banking Chapter 06

Prohibitions• No brokerage in the form of commission or gifts should be paidto collect the

deposit.•Gift in excess of Rs.250/- should not be given.•No incentive should be given as price for

deposit mobilizationschemes.•No advances should be given on fixed deposits of the

otherbanks•No lunch/lottery/free trips oriented deposit scheme can belaunched.•Adverts can not

be issued highlighting compounded interestwithout indicating actual simple interest.•Banks can

not prematurely repay the term deposit of theircustomers on their own. Fixed Deposit Accounts

Retail Banking

 

6owever, ta on interest from fi ed deposits is not 1BD it is applicable at the rate of ta

slab of the deposit holder. If any ta on Fi ed eposit interest is due after ' %, the holder

is e pected to declare it in Income 'a returns and pay it by himself.If the total income for a

year does not fall within the overall ta able limits, customers cansubmit a Form 0 5 (below

81 years of age) or Form 0 6 (above 81 years of age) to the  bank when starting the F and at

the start of every financial year to avoid ' %.

How bank FD rates of interest vary with Central Bank policy

In certain macroeconomic   conditions (particularly during periods of high inflation) a !entral ;ank

adopts a tight monetary policy, that is, it hikes the interest rates at which it lends to banks (>repo

rates>). $nder such conditions, banks also hike both their lending (i.e. loan) as well as deposit

(F ) rates. $nder such conditions of high F rates, F s  become an attractive investment

avenue as they offer good returns and are almost completely secure with no risk 

-

citation needed  

.

Fi ed deposits E  "ationalised banks offer  better interest rates than  private banks

nationalised banks are better options compared with private banks

Jou may be searching for higher interest rates to lock your savings for one year or more. 4ver the

last one month, long=term fi ed deposits (F ) rates have been on a decline. It started with

%tate ;ank of India (%;I) slashing the rates, which now stands at .0B p.a. for any F term of

one to 1years. 'he long=term F rates of %;I are less competitive when compared to many

other nationalised banks, which still give C.20B=C.90B p.a. ;igger private sector lenders like I!I!

I ;ank, 6 F! ;ank and A is ;ank also moved uickly to adGust their rates, which are usually

1.20B to 1.0B higher than %;I rates. 'he ma imum rates with I!I!I ;ank and 6 F! ;ank are

./0B p.a.D while A is ;ank offers CB p.a. It means nationalised banks are still a better bet for

higher interest rates when compared to big private banks. After a delay, smaller private players

like &otak @ahindra ;ank, J:% ;ank, &arur Kysya ;ank and IndusInd bank lowered their rates to

CB=C.20B p.a. 'ill +th 4ctober, cooperative bank like %araswat ;ank was offering 1B simple

interest paid uarterly, which is now reduced to C.20B. While locking at 1B is not possible

today from well known banks, nationalised banks can get you C.9B to C.90B interest for a F

of one to two years tenure, which isa good option.

 

Few cooperative banks are offering C./0B to 1.20B interest rate on F s today. ;ut safety of

your funds should have higher priority than earning 1.0B to B more interest.

 Moneylife

 foundation highlights this point in L6ow to be safe with your moneyM seminars. @oreover,

smaller cooperative banks can charge higher  penalties for premature withdrawal and therefore

li uidity of the F before maturity can be a concern. For e ample, 'hane Nanata

%ahakari ;ank does not allow premature withdrawal, which is a big drawback and risk for

saver. :nsure that your F penalty clause for premature withdrawal is not worse than the

industry standard which is OIf the depositor opts for premature closure, B penal interest

shall be charged on the rate applicable for which the deposit remained with the bank.P For

short=term F options with no penalty clause, <ead ;est <eturns %hort=term F or

Fle i F Q  http ??moneylife.in?article?best=returns=short=term=fd=or= fle i=fd?

2C .html  Any wording better than this for long=term F of one year or more will be to

the advantage of the saver. ;ank of @aharashtra charges no penalty for F up to one year term.

%;I charges 1.0B penalty for F s of one year or more duration that is less than the rate for

which deposit remained with the bank.

ARE FIXED DEPOSITS SAFE?

•

In IndiaFixed Depositsare considered to be very safe investments andthey are used to denote a larger class of

investments with varying levels of liquidity

•

Fixed deposits are a high-interest-yielding Term deposit offered by banksin India. Fixed Deposits are recommended

by maximum no. of wealthmanagers.

WHY FIXED DEPOSITS OVER OTHER OPTIONS

•

To compensate for the low liquidity, Fixed Deposits offer higher rates of interest than saving accounts. Generally,

the longer the term of deposit,higher is the rate of interest

•

Owing to the current dynamics in economic conditions and financial crisis,Fixed Deposits are the

most preferred option over Stock Investments, GoldInvestments and other forms of investment

BENEFITS OF FIXED DEPOSIT

•

Customers can avail loans against Fixed Deposits up to 80 to 90 per cent of the value of deposits. The rate of

interest on the loan could be 1 to 2 percent over the rate offered on the deposit.

•

Non Resident Indians and a Person of Indian Origin can also open theseaccounts

A good investment strategy requires choosing the right mix of safe and risky investments. Among safe

investments, fixed deposits, FDs, are the most popular today.

With FDs you deposit a lump sum of money for a fixed period ranging from a few weeks to a few years and earn a pre-determined rate of interest. FDs are offered by both banks and companies though putting your money with the latter is generally considered riskier.

What are the advantages and disadvantages of FDs?

The main advantage is that FDs from reputed banks are a very safe investment because such banks are carefully regulated by the Reserve Bank of India, RBI, the banking regulator in India.

Note that company FDs isn't as safe as bank FDs because if the company goes bankrupt you may lose your money. Make sure you check the credit rating of a company before investing in its FDs. You should be especially wary of companies which offer interest rates significantly higher than the average to attract your money.

The other advantage of FDs is that you have the option of receiving regular income through the interest payments that are made every month or quarter. This option is especially useful for retirees.

On the flip side, a fixed deposit won't give you the same returns that you may get in the stock markets. For instance a stock-portfolio may rise 20-30 per cent in a good year whereas a fixed deposit typically earns only 7-10 per cent.

A fixed deposit also doesn't offer protection against inflation. If inflation rises steeply during the maturity of the FD your inflation adjusted return will fall.

Say, for example, the inflation when you deposited the money at a fixed return of 8 per cent per annum is 3 per cent. Now when your FD matures say after 2 years, the inflation increases to say 5 per cent.

Want a fixed return? Try these investments

In this case, your inflation adjusted returns is only 3 per cent (8-5). Had inflation remained at 3 per cent by the time your deposit matured, your real rate of return would be 5 per cent (8-3).

Interest rates on FDs

The rate of interest on FDs varies according to the maturity with longer deposits generally earning a higher interest rate. Here are the interest rates offered by ICICI Bank on their FDs. Note that FDs vary quite a bit from bank to bank so you should search around before investing.

Interest paid on a fixed deposit is paid either monthly or quarterly according to the investor's choice. So if you invest Rs 3 lakhs in a one year fixed deposit which pays 8 per cent you can earn Rs 2,000 of interest every month or Rs 6,000 of interest every quarter.

Effective Return

Before you invest in FDs you need to understand the concept of effective return which is higher than the rate of interest on the FD.  Effective return is relevant if you choose to reinvest your interest every year which means that you will be earning compound interest.

For example suppose you invest Rs 1,000 in a fixed deposit with 8 per cent interest which is paid quarterly.

Want to save tax and get fixed returns?  

In the first quarter (after 3 months) you will earn an interest of Rs 20 which is re-invested and continues to earn interest in the remaining three quarters. Similarly the interest you earn in the second (after 6 months) and third quarter (after 9 months) is also reinvested and earns interest.

At the end of the year because of compound interest you will receive Rs 1,082.4 meaning that your effective return is 8.24 per cent rather than 8 per cent.

What happens if you break a fixed deposit?

Breaking a fixed deposit means withdrawing the money before the maturity expires. This may be necessary if you urgently require the funds or if there are better investment opportunities elsewhere. You will have to pay a cost; for instance you may receive an interest rate 1 per cent lower than the stated interest rate on the FD.

For example if you invested in a 3 year FD with 9 per cent and you break it after two years you may receive only 8 per cent interest for those two year instead of 9 per cent.

An alternative to breaking a fixed deposit is taking a loan against the FD. Such loans are quite easy to obtain with amounts ranging up to 90 per cent of the principal and accumulated interest.

Are there better alternatives to FDs?

Obviously mutual funds and stocks can offer higher returns but the main issue is whether there are low risk investment products which offer a better return than FDs. Many financial experts believe that fixed maturity plans (FMP) offer exactly such a superior alternative.

Should you invest in FMPs?  

Fixed maturity plans are similar to FDs in that they have a pre-determined tenure (say 3 years like the maturity of an FD) ranging from a few weeks to a few years. Your money is invested in fixed-income assets like governments bonds and money-market instruments which carry a low risk. The one major point where FDs score over FMPs is that the latter does assure you any guaranteed returns.

However, the main advantage of FMP's is that you can take into account inflation while calculating your taxes which means that your after-tax return may be superior to FDs, especially if you lie in the top income tax bracket.

FIXED DEPOSIT : FIXED DEPOSIT The account which is opened for a particular fixed period (time) by depositing particular amount (money) is known as Fixed (Term) Deposit Account. The term ' fixed deposit ' means that the deposit is fixed and repayable only after a specific period is over.

Slide 3: Fixed Deposit Example: For example, a Fixed Deposit will often be used by individuals, businesses and financial institutions around the world as a means of storing their liquid funds for a fixed period of time for future use. In the retail market, Fixed Deposits are relatively safe investments when provided by insured financial institutions such as banks, savings and loan corporations and credit unions that are duly regulated within the country in which they operate. Also, while the term Fixed Deposit is in common usage in India and some other countries, Fixed Deposits are also known as term deposits in countries like Australia, Canada and New Zealand, as time deposits in the United States and as bonds in Great Britain.