Fixed deposits have always remained a popular investment choice in India. Most people, especially senior citizens prefer to lock their money in fixed deposit accounts owing to their general characteristic of being a safe option, guaranteeing a surety of returns. Many people rely on the monthly interest generated from the FDs as a main or additional source of income. Despite the falling rates of interest on FDs in the past few years, people continue to invest in them. Most people prefer to opt for long-term deposits, purely because they offer far more decent rates of interest than short-term ones. Here are a few things you must know if you’re planning to invest in an FD.
You can choose how your interest is paid: When you fill your FD form you can opt to receive interest either on a monthly or quarterly basis. The money will be credited to your account on a stipulated date mentioned on your FD receipt. Most banks offer an interest rate of 6-8 percent per annum. Senior citizens can get an additional .25-.75% interest on their deposits. A third option for receiving the interest is the cumulative fixed deposit where you can get your entire sum plus the interest only when the FD matures.
You can choose to reinvest your interest: Return on FD and interest received are two separate things. Most people opt to reinvest the interest paid on their FDs. This basically means that you do not make any withdrawal on the interest paid, thus increasing your principal. Let’s say that you opt for quarterly interest payments, but without withdrawing the interest. In this case, your bank will add your interest to your principal amount, and pay you interest on this compounded amount. If you keep repeating this process, your return on interest will be higher. This option is ideal for people who are not dependent on income from their fixed deposits. It therefore makes more sense for them, to opt for reinvestment of interest drawn, to earn higher returns.
Premature withdrawals invoke penalties: At times you may be tempted to break your FD. This could be because you need the money urgently, due to unforeseen circumstances or because another bank is offering a higher rate of interest. Whatever the circumstance, if you break an FD, you must pay the cost attached to it. If you choose to prematurely withdraw the FD, your bank may allow you to make the withdrawal for an interest that is 0.5% lower than the actual applicable interest for the period that the deposit remained with the bank. Some banks also allow premature withdrawals on pro-rata basis.
Interest earned on fixed deposit schemes isn’t tax free: The interest you earn on your FD gets added to the income you earn in a given year. You are therefore taxed according to the tax bracket you fall into. If you fall into the top tax bracket on income through FD, you are taxed at the rate of 33.99%.
You can choose how your interest is paid: When you fill your FD form you can opt to receive interest either on a monthly or quarterly basis. The money will be credited to your account on a stipulated date mentioned on your FD receipt. Most banks offer an interest rate of 6-8 percent per annum. Senior citizens can get an additional .25-.75% interest on their deposits. A third option for receiving the interest is the cumulative fixed deposit where you can get your entire sum plus the interest only when the FD matures.
You can choose to reinvest your interest: Return on FD and interest received are two separate things. Most people opt to reinvest the interest paid on their FDs. This basically means that you do not make any withdrawal on the interest paid, thus increasing your principal. Let’s say that you opt for quarterly interest payments, but without withdrawing the interest. In this case, your bank will add your interest to your principal amount, and pay you interest on this compounded amount. If you keep repeating this process, your return on interest will be higher. This option is ideal for people who are not dependent on income from their fixed deposits. It therefore makes more sense for them, to opt for reinvestment of interest drawn, to earn higher returns.
Premature withdrawals invoke penalties: At times you may be tempted to break your FD. This could be because you need the money urgently, due to unforeseen circumstances or because another bank is offering a higher rate of interest. Whatever the circumstance, if you break an FD, you must pay the cost attached to it. If you choose to prematurely withdraw the FD, your bank may allow you to make the withdrawal for an interest that is 0.5% lower than the actual applicable interest for the period that the deposit remained with the bank. Some banks also allow premature withdrawals on pro-rata basis.
Interest earned on fixed deposit schemes isn’t tax free: The interest you earn on your FD gets added to the income you earn in a given year. You are therefore taxed according to the tax bracket you fall into. If you fall into the top tax bracket on income through FD, you are taxed at the rate of 33.99%.
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