Fixed Deposits

Fixed Deposit is a regular source of investment. It is a financial instrument where the investor places a specific sum of money in a bank or company for a predetermined tenure ranging from 7 days to up to 10 years. The financial institution provides interest at a specified rate on the fixed deposit. There are different options to pay the interest, such as monthly, quarterly, or at the end of the fixed deposit tenure. Here are some convincing reasons for investing in fixed deposits.

• Guaranteed and risk-free investment: Fixed deposits are safe investment options that guarantee a fixed and regular source of income. Unlike the investments in stocks and bonds of companies, fixed deposits offer guaranteed returns because they do not depend on market fluctuations. The bank or company providing the deposit is obligated to pay the interest at the rate mentioned on the fixed deposit receipt.
• Higher interest rate: As compared to savings deposits, fixed deposits offer a higher rate on the investment, which can be calculated using an FD Calculator. Secondly, investment in fixed deposits yields better returns than investments made in other risk-free instruments like Government bonds or Treasury bills.
• Flexibility: Fixed deposits are the most flexible investment opportunities. Banks offer fixed deposits for periods ranging from 7 days to up to 10 years. The investor is free to choose their tenure at the time of investing.
• Liquidity: Savings and current deposits are the most liquid of all deposit instruments because of the facility to withdraw the demand deposit. In comparison, fixed deposits are less liquid. However, banks offer facilities for premature withdrawal of fixed deposits at any time during their tenure. Depositors are also eligible to avail of loans against their fixed deposits if required.
• Availability of flexible interest payouts: Facilities to receive interest at periodical intervals, such as monthly or quarterly, are available. Hence, fixed deposits offer a regular source of income to the depositor.
• Tax-Saving Instruments: Fixed deposits also offer investment opportunities to save tax. Sec 80C of the IT Act 1961 allows people to save income tax by investing in Tax Saving Deposits for a minimum period of 5 years up to 1.50 Lakhs every year.

• Instead of investing a bulk amount in a single deposit, it is advisable to split the amount into smaller deposits. It helps the depositor in an emergency because it enables you to break a small portion while allowing the balance amount to gain interest and keep growing.
• Splitting the deposit into smaller amounts and investing it for varying tenures can help you earn better interest. It is because banks keep changing their deposit interest rates at frequent intervals. Secondly, it ensures liquidity because of the varying maturity periods.
• It is important to note that certain fixed deposits, like the Tax-Saving deposits, come with a lock-in period. Withdrawal of the deposit is not permissible before the due date. Similarly, loans and overdrafts are not available on these tax-saving deposits.
• Premature withdrawals can attract a penalty depending on the amount of withdrawal and the period for which it remained with the bank. Hence, your returns can be lower in the case of premature withdrawal.
• The interest received on fixed deposits is taxable at source. As of the date, the banks have to deduct TDS on the interest paid on fixed deposits if it exceeds 40,000 in one financial year. In the case of senior citizens, the ceiling is 50,000.
• Depositors have the option of submitting Form 15G or 15H along with their PAN details to ensure that banks do not deduct TDS. Under such circumstances, the depositor has the responsibility of paying income tax on the interest earned during the financial year.
• Senior citizens have the advantage of getting a higher rate of interest as compared to the general depositors.
• The Reserve Bank of India (RBI) has freed the Fixed Deposit Interest Rates from its control. Hence, banks can offer different rates of interest on fixed deposits depending on their liquidity position.

There is intense competition between the private and public sector banks in offering higher rates of interest on fixed deposits for varying periods. Private and cooperative banks offer a higher rate of interest as compared to public sector banks.

Senior citizens (aged 60 and above) get the benefit of a higher rate of interest. Usually, the rate of interest on a senior citizen FD is 0.50% more than that offered to general depositors.

Sec 80C of the IT Act 1961 allows individuals to save income tax by investing up to 1.50 Lakhs in Tax-Saving Fixed Deposit Schemes for a minimum period of 5 years. The rates of interest on these fixed deposits are the same as those for general deposits. These tax-saving deposits come with a lock-in period of 5 years. Banks allow premature withdrawal of these deposits after the expiry of the lock-in period. The minimum amount of deposit can vary from one bank to another.

• Company Fixed Deposits offer a better rate of interest as compared to bank deposits
• Though companies accept deposits for periods up to 120 months, the popular tenure for a company deposit is between 12 and 36 months.
• Company deposits come with a lock-in period, whereby investors cannot withdraw during this tenure.
• Premature withdrawals attract a specific penalty, usually up to 2% for the period that the deposit remained with the company.
• Senior citizens can avail of better interest rates from company deposits as compared to the general investors.
• The companies do not deduct TDS on interest income up to 5,000 during a financial year. Depositors can submit Form 15G or 15H to avoid deduction of TDS.

• Company deposits are unsecured deposits. They are not secured by the assets of the company. These deposits do not have coverage from the Deposit Insurance and Credit Guarantee Corporation. Bank deposits, on the other hand, are insured up to a maximum of 1 Lakh. Hence, company deposits are riskier in comparison to bank deposits.
• Companies are subject to scrutiny by rating agencies like CRISIL, CARE, ICRA, and many others. These agencies evaluate the company deposits based on their past performance, their current liquidity levels, the market position, the ability to repay, and many more factors.
• Irrespective of the safety rating, company deposits are riskier to the bank deposits
• Banks deduct TDS if the interest payable on the deposit exceeds 40,000 in a financial year. For companies, the corresponding figure is 5,000.
• Company deposits are the best if you are looking for high-interest rates
• Checking the background of the company before investing in it is advisable. If the company has a low rating, it is better to go for a short-term FD.

NBFCs and other top companies offer fixed deposit facilities to customers. Here are the top 10 company fixed deposit providers in India.

Banks offer a range of deposits ranging from 7 days to up to 10 years. On the other hand, company deposits come with a tenure ranging between 12 and 120 months. Both banks and NBFCs offer cumulative as well as non-cumulative fixed deposit schemes.

Cumulative Deposits

As the name suggests, the interest is accumulated and paid at the time of maturity of the deposit. Hence, depositors get the benefit of compounding of interest. It implies that the total yield on the deposit is more than the contracted rate of interest on the fixed deposit.

The cumulative deposits offered by banks and NBFCs have a maturity period of a minimum of six months and up to 120 months. In this scheme, the interest is not payable to the depositor but added to the deposit account.

Non-cumulative Deposits

As opposed to cumulative deposit schemes, the interest on non-cumulative deposits is credited to the savings account of the depositor or paid to him at regular intervals. It can be monthly, quarterly, or half-yearly intervals as decided by the depositor at the time of placing the deposit. Since the interest is paid on accrual basis, these deposits attract a simple rate of interest. The advantage of non-cumulative deposits is that the depositor gets assured monthly, quarterly, or half-yearly payouts that can act as a regular source of income. In the case of a monthly payout, the depositor receives a discounted rate that is less than the contracted rate of the fixed deposit.

Banks and NBFCs offer deposit schemes that enable customers to save on the income tax burden. Sec 80C of the IT Act 1961 allows income tax concessions on fixed deposits made in specific Tax Saving FDs in banks and NBFCs.

• The Tax Saving FDs are available in all banks
• The maximum deposit amount is 1,50,000
• The deposit tenures range between 60 and 120 months
• No premature payment is allowed before the expiry of 5 years from the date of the deposit
• No loan is permissible on Tax Saving FDs before the completion of 5 years
• After 5 years, the banks permit premature withdrawal
• The amount invested in such deposits is deducted from the Gross Total Income to arrive at the taxable income for the specific year.
• The rates of interest on Tax Saving deposits is the same as that offered on general deposits for the corresponding period.

• Non-individuals cannot invest in Tax Savings FDs. Individuals and HUFs can invest in such schemes.
• The minimum amount of deposit can vary from one bank to another
• Co-operative and Rural banks cannot accept tax-saving FDs
• Depositors can also invest in Post Office Time Deposit for five years to qualify for deduction under Sec 80C of the IT Act.
• Deposits can be in Single or Joint mode. In the case of joint accounts, the tax benefit is available to the first holder alone.
• TDS is applicable on the tax savings FD. Depositors can submit Form 15G or 15H to avoid deduction of TDS by the bank.
• Nomination facility is available to Tax Savings Deposits
• Senior citizens can avail the benefit of additional rate of interest on these tax-saving FDs, as well