Fixed Deposits — A Quick Guide

Fixed Deposits have always been popular with Indians. My grandparents and parents would swear by them. In fact, any spare money was met with “make an FD” kind of response so popular has this : been as a method of saving. It is safe, highly liquid and yields returns that can cope with inflation.

There is an interesting dichotomy at play when it comes to saving money these days. The older generation was much more frugal, trying to save every Rupee that landed in their account. At the same time they had to walk to the bank to create Fixed and Recurring deposit accounts, for which they had to take time out from work or sacrifice some Saturday time. Nowadays, banking has become completely digital. One can create a deposit account instantaneousl, by the click of a button. But the present generation is not that tuned in to saving. When it’s easier, it’s not being practiced!

It’s time you started looking at your saving habits, to be prepared for a rainy day or a large expenditure. Here’s a quick guide:

Types of Fixed Deposits

There are a number of different deposits that each bank offers. Broadly the following are the ones you would find with any bank:

1. Regular Fixed Deposit: These are deposits whose duration varies from 7 days to 10 years. Interest rates vary depending on the duration of deposit, for example a 7 day one would earn you 3.5 % and a one year deposit can earn you 8%. These are just ballpark numbers; they vary from bank to bank. Senior citizens generally get at-least 0.5% more than others.
2. 5 year Tax Saving Fixed Deposit: This is a 5 year locked in deposit, and the deposit can be considered as investment under Section 80C for tax saving. This is misunderstood by some people that the interest is not taxable. The interest from the Tax saving deposit is completely taxable. In fact the bank will deduct 10% TDS on interest greater than INR 10,000/year. Therefore if you are unable to hit your 80C limit, this is not a bad option.
3. Recurring Deposit: My personal favourite. The Recurring Deposit referred to as RD, is systematic deposit from a savings account into a deposit account. It is a simple yet beautiful way to save money to achieve financial goals. The advantage is that very small amounts can be made as a recurring deposit. It also inculcates the habit of regular month-on-month saving. Most Banks specify 6 months as a minimum tenure. The interest rates are similar to those of a Fixed Deposit.

Penalties

Depending on the bank, Fixed Deposits may entail a penalty if the deposits are liquidated before the original date of maturity. The penalty will be in the form of reduced interest payout if withdrawn prematurely. For example if you invest 1 lakh in a FD for a year at the interest rate of 8%. The amount you would get after 1 year would be INR 1,08,000/- . In case you break the FD after the 6 months, you may only get an interest of 7% which would amount to INR 1,03,500/-. The 1% difference is the penalty. Therefore please think twice before breaking FD’s prematurely unless it’s of utmost importance.

Habitual Non-saver

If you are one of those who have not thought about saving, start now!

The easiest way to start is to logon to your net banking account and create a small RD or FD. There you go, you are already on your way to creating a small pot of money that may come in immense use later.

Secondly, start tallying your incomes and spends, through which you would know the extent of saving.

Third, think of how to save more and invest.

Get going, it’s a race against time!

Arjun Balakrishnan is an investment fanatic who loves writing about investment topics. He regularly writes at Investment Gyaan.