Things to Keep in Mind Before Opening a Fixed Deposit

Posted in Investment Tips By Sajhyadri Chattopadhyay -
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Opening a Fixed Deposit (FD) is like planting a seed for your financial future. For Indians seeking both financial stability and growth, understanding the nuances before embarking on this financial journey is crucial. According to a survey by SEBI, over 90% of Indian families would rather keep their surplus funds in fixed deposits than other long-term investment tools. Indeed, few other financial tools have gained this much popularity in India like fixed deposits. Let's unravel the key considerations, documents, procedures, benefits, etc. associated with booking an FD. 

The popularity of fixed deposits is still an untested matter, but there are a few factors that you should go over before you finalise on the right scheme. 

Necessary Documents

Identity Proof: Aadhar card, PAN card, or passport.

  • Importance: Vital for establishing your identity as a legitimate investor.

Address Proof: Utility bill, Aadhar card, or voter ID.

  • Importance: Essential to confirm your residence and comply with regulatory norms.

Photo ID: Typically, 2-3 recent passport-sized photographs. 

  • Importance: A visual confirmation for your banking records, adding an extra layer of security. 

Income Proof: Salary slips for salaried individuals, income tax returns for self-employed individuals. 

  • Importance: Required especially for larger FD amounts to gauge your financial stability, your debts and liabilities, etc.  

Choosing the Right Financier

Selecting the right bank or NBFC is crucial for a successful FD. Consider factors like the financier's reputation, customer service, and, most importantly, the interest rates they offer. For instance, a bank with a solid track record not only ensures the safety of your investment but can also provide better interest rates than less reputable counterparts. Choosing wisely here can significantly impact your returns and overall satisfaction with the investment. 

Types of Fixed Deposits

Regular FDs: 

Standard FDs with fixed interest rates.

Benefits: Suitable for general savings with a fixed tenures.

Tax-saving FDs: 

FDs with a lock-in period of 5 years and tax benefits under Section 80C of the Income Tax Act.

Benefits: Offers both capital appreciation and tax savings.

Senior Citizen FDs: 

Tailored for senior citizens with 0.25-0.75% higher interest rates than regular FDs, ensuring better returns for the elderly.  

Benefits: Provides additional income for retirees with enhanced returns.  

Interest Rates and Calculations

The heart of an FD lies in its interest rates. Research and compare rates offered by different banks, as even a small difference can significantly impact your returns. For example, a 0.5% increase in interest on a 5-year FD of ₹1 Lakh can yield an additional ₹500 at maturity. Additionally, understanding how interest is calculated—simple vs. compound—empowers you to make informed decisions. Using an FD Calculator can not only help you get accurate results but also make this endeavour an easy one!.  

Lock-in Period and Premature Withdrawals

The lock-in period, the duration during which you cannot withdraw your funds without incurring penalties, is a critical factor. Longer lock-in periods often come with higher interest rates, but they limit liquidity. For instance, if you withdraw funds before the lock-in period ends, you may face penalties, impacting your overall returns. Understanding this balance ensures you choose a tenure aligning with your financial goals and liquidity needs, striking a harmonious balance between returns and accessibility. 

Nomination and Auto-renewal Facilities

Don't overlook the critical features of nominating a beneficiary and opting for auto-renewal when considering fixed deposits. Nominating ensures a smooth transfer of funds to your chosen recipient in case of unforeseen circumstances, providing financial security. Without a nominee, legal complications may arise, delaying the transfer of funds. Simultaneously, opting for auto-renewal simplifies the investment process, allowing seamless reinvestment at maturity, and preventing idle funds. These facilities not only enhance the overall convenience of managing your FD but also contribute to a comprehensive and hassle-free financial strategy.  

Tax Implications

Tax on Interest:

  • Applicability: Interest earned on FDs is taxable.

  • Rate: Based on your income tax slab.

TDS (Tax Deducted at Source): Banks deduct TDS if the interest exceeds ₹40,000 (₹50,000 for senior citizens). 

Tax-saving FDs: 

  • Applicability: Tax-saving FDs qualify for deductions under Section 80C of the Income Tax Act,1961.

  • Limit: Up to ₹1.5 lakh can be claimed as a deduction. 

Note: The interest on Tax-saving FDs is still taxable; only the principal amount qualifies for a deduction under Section 80C, reducing the overall tax liability. 

TDS Exemption for Senior Citizens: 

  • Applicability: Senior citizens can submit Form 15H to get a TDS exemption.

  • Criteria: For individuals aged 60 years or above 

Benefits and Security

  • Capital Preservation: 

FDs guarantee the safety of your initial investment and act as a financial cushion during economic uncertainties. 

  • Stable Returns:

Fixed returns provide financial stability, especially beneficial during economic downturns. 

  • Diversification Strategy:

FDs complement a diversified investment portfolio and balance riskier investments with stable returns. 

  • Emergency Fund Foundation:

FDs serve as a reliable foundation for emergency funds, providing quick access to funds during unforeseen circumstances. 

 

In the intricate world of savings, FDs tend to stand out as a beacon of financial stability. A disciplined approach and assured returns make FDs the better choice for our Indian savers looking for a secure and fruitful investment. See your savings make an impressive growth over time as you earn up to 8.10% interest annually by opening a Fixed Deposit only on Bajaj Markets! Choose your deposit amount, plan tenor, and interest rate and easily calculate how much return you will get when your plan matures.

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