All you need to know about fixed deposits

We all remember the story from our childhood years about a thirsty crow who would patiently drop one pebble in the pot every time and wait for the water to eventually rise. Investments are a lot like that, requiring immense patience and time to give you assured and worthwhile returns. However, in a volatile market, assured returns are not salient to all financial instruments. Therefore, the presence of at least one fixed deposit in one’s personal financial planning is crucial and prudent. 

A fixed deposit simply means a sum of money deposited for a specific duration. You can opt for a fixed deposit either through banks or non-banking institutions. When you open a company fixed deposit with Bajaj Finance for example, not only do you enjoy high credibility and safety, you can also benefit from a high interest rate, flexible tenure and a minimal investment amount.

If you are planning on investing in a fixed deposit but are struggling to understand its intricacies, this post will help answer all of your doubts and questions.

How do fixed deposits work

Fixed Deposits are deposits for a fixed or specified period chosen by the investor at a fixed rate of interest. You can deposit money for as short a period as 7 days and usually up to 10 years.

When you open a fixed deposit with a bank or even a non banking financial company, the bank utilizes your money to lend loans to borrowers. In return, it pays you an interest. Each bank or financial institution that is offering fixed deposits fixes its own deposit rates. It is influenced by the changes in repo rates as revised by the Reserve Bank of India from time to time. The interest of FD varies based on the time period and the amount deposited. Moreover, most of the banks offer higher interest rates to senior citizens. Moreover, NBFCs are likely to offer higher interest rates than banks.

During the course of the FD, even if the prevailing interest rates fluctuate up or down, you will be entitled to the rate of interest that was promised to you when you first made the deposit. This assurance is comforting for the investor, an important reason why fixed deposits are so popular.

What does ‘maturity’ mean in a fixed deposit?

The maturity value of a fixed deposit refers to the amount payable to the customer at the end of the term of the fixed deposit. This value is subject to deductions of any taxes applicable.

Consider this simple example to understand it better.

Anita starts a fixed deposit of Rs.100,000 in XYZ Bank for a period of two years. The fixed deposit yields her an interest rate of 9% per annum. Therefore, at the end of two years, Anita will get the maturity value of Rs.118,000.

Can fixed deposits help you save on taxes?

According to the Income Tax Regulations, interest income of up to Rs. 5,000 from company fixed deposits is free from taxation. If your total taxable income, including interest from your FDs, is lower than the taxable amount, you can submit form 15G/15H and not pay any tax on this amount.

How much interest rate do you get on your deposit?

There is no fixed interest rate applicable to fixed deposits. Different banks and companies offer different interest rates, largely hovering around 8-9%.

For instance, Bajaj Finance Fixed Deposit offers a lucrative interest rate of 8.60%, which can go up to 8.95%. With a high interest rate on FD, you can accumulate your wealth and grow your corpus.

Now, it is important to note here that the investor has the freedom to choose the interest payout frequency according to your requirements. For example, if you have a need for periodic payouts, you can opt for a non-cumulative FD with monthly, quarterly or semi-annual payouts.

On the other hand, if your goal is wealth creation, you can choose a cumulative FD where the interest is compounded and the principal and interest are handed over to you when the tenor lapses. As you inch closer to your retirement years, it is a wise financial move to shift your attention to non-cumulative modes of investment. This will ensure that you get periodic payments from your investment.

If you consider renewing your FD at the end of your tenor, you usually get an additional interest which is over and above the prevailing interest rates.

Can you open a joint fixed deposit?

You can choose to open your fixed deposit jointly with someone, for instance, your parents, siblings, or spouse. In a joint fixed deposit, the first account holder has to pay the TDS (Tax Deducted at Source) over the returns. Similarly, the interest is also paid to the first holder’s account.

Can a fixed deposit help you during a financial emergency?

You can easily take a loan against your fixed deposit during times of emergency without having to break it. These loans are secure as your FD amount acts as the collateral, and therefore hassle-free to avail. For instance, through a Bajaj Finserv fixed deposit, you can opt for an instant online loan against your fixed deposit, where you can take a loan up to Rs. 4 lakh.

Can you break your FD ahead of its tenor?

There might arise numerous situations wherein you may need your money back due to unforeseeable circumstances. In such a scenario it is always important to have investments that allow you to access funds immediately. Unlike other investments that have an exit load, or ones that can’t be broken until a fixed amount of time has passed, you can liquidate your fixed deposit whenever you feel the need to.

Can the fixed deposit plan be modified?

Yes, you can modify your financial plan for fixed deposit and determine the returns in advance through a FD calculator like Bajaj Finance Fixed Deposit Calculator. All you need to do is enter your investment amount and tenor, which will display the maturity amount and interest earned.

For the plethora of reasons enunciated above, it is a wise financial decision to opt for a fixed deposit. It is a safe and secure way of preparing for a carefree life after retirement.

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