Things to Keep in Mind Before Investing in a Fixed Deposit

A fixed deposit is a widely preferred investment option. It is an easy and safe investment tool where you just have to invest a lump sum amount of money for a specific tenor at a fixed interest rate. 

You will earn an interest income on the corpus that you will receive along with the invested money at the time of maturity. Let’s explore some important factors to note while starting an FD.

The fixed deposit interest rates can differ across different issuers. Various factors play a crucial role in determining these rates, such as the duration of the deposit, the amount invested, and the category of the customer. The FD interest rates are higher if the tenor is higher.

Senior citizens also get an additional interest rate that is around 0.25-0.50% higher than that offered to non-senior citizen investors. The fixed deposit interest rate is usually in the range of 3% to 7%; a bulk deposit might get you a higher interest rate than usual. 

Before starting your fixed deposit, you should always make sure that the bank or NBFC has a higher credibility rating. This will ensure that your amount is safe, and you will not face any trouble while receiving your interest income from the financier. 

Under the depositor insurance program by DICGC, you get insurance of up to ₹5 Lakhs on your bank FD. You can also invest your money in different banks or NBFCs instead of putting all your money in one bank FD.

There are mainly two types of fixed deposits, cumulative and non-cumulative. 

In a cumulative fixed deposit, interest earned at regular intervals is compounded over time. You receive the accumulated interest at the time of maturity of your FD. On the other hand, in a non-cumulative FD, you receive the interest income on periodic intervals as per your preference, like a monthly, quarterly, half-yearly, or yearly pay out. 

A cumulative fixed deposit is ideal if you have long term goals, whereas a non-cumulative FD is perfect for people like retirees or pensioners who want to receive regular interest income in periodic pay out to meet their daily expenses.

In the event of a premature withdrawal of FD, the bank or non-banking financial company (NBFC) may impose a penalty. You will usually be penalised by getting a reduced interest rate of 0.5% to 2%, depending on when the fixed deposit is withdrawn. 

Some of the banks also have a facility where no penalty is levied, provided you reinvest the amount in the same bank on another FD with a higher tenor. The penalties associated with premature withdrawal of a fixed deposit vary among different banks.

Therefore, if you are anticipating any major expense where you might have to make a premature withdrawal of FD, you should opt for a bank with low penalty charges.

If you earn interest on your fixed deposit, then you are required to pay TDS on fixed deposit according to your income slab. If your total interest income from fixed deposits in a year totals to more than ₹40,000, then 10% of that amount will be deducted as TDS. 

Senior citizens can also get a tax deduction of up to ₹50,000 in a year on all their interest income from fixed deposits under Section 80TTB.

Almost all major banks and NBFCs allow taking a loan against fixed deposit. You can cater to any financial emergency by taking a loan against FD and, thereby, avoid losing out on the interest income. 

An interest rate of around 0.5% to 2% is charged above the applicable interest rate on loan against FD. You can compare and opt for the best fixed deposit, which has the lowest applicable interest rate for a loan against a fixed deposit.

Every issuer has its own minimum and maximum deposit limit for fixed deposit accounts. It is recommended to confirm these limits directly with the financial institution before proceeding with an investment. 

For example, the State Bank of India (SBI) has a minimum requirement of ₹1,000 for their fixed deposits, while there is no specified maximum fixed deposit amount limit. Conversely, ICICI Bank has different minimum limits depending on the account holder's age group. For minors, the minimum requirement is ₹2,000, whereas for regular citizens, this limit stands at ₹10,000.

When considering fixed deposits, it is important to carefully evaluate the tenor as fixed deposits are booked for a specified duration. The choice of your FD tenor can be tailored according to your preferences, ranging from 1 year to 10 years. Certain financial institutions even offer fixed deposits with durations as short as 7 days. 

Banks, NBFCs, and other financial institutions have different minimum and maximum tenors for fixed deposits. The best way to go is to take into account your financial goals and requirements before selecting the tenor for your fixed deposit. This will help you to make a smart investment decision.

If you are the sole depositor of a fixed deposit account, nominating someone as a beneficiary can be beneficial. By adding a nominee, you establish a safeguard that ensures hassle-free claims of the amount of the fixed deposit, along with interest, in the unfortunate event of the account holder's demise.

Nomination facilitates a seamless transfer of funds and interest to the rightful heir without any complexities or delays. Without a nominee, these processes can be quite tedious and involve several verification processes to get done. 

Many issuers offer a feature of automatically renewing fixed deposits (FDs) once the investment has reached the maturity date. Auto renewals can be quite helpful, as it allows you to park the fund with a given issuer for several years on end, without requiring any intervention on your end. 

When opening an FD, you have the option to choose automatic renewal or opt out of it by indicating your preference in the FD form. If you forget to specify your choice, you can visit your issuer’s branch and request that the amount be credited to your bank savings account.