5 smart tips to bring the best out of bank fixed deposits

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Updated: July 12, 2021 1:56 PM

In order to mitigate the reinvestment risk and to ensure liquidity, one may use the ‘laddering’ approach while investing in bank fixed deposits.

Bank fixed deposits, interest rate, Senior citizens, Tax saving FD, Section 80CSenior citizens always get an additional rate of interest of about 0.5 per cent on FD's in all banks

Fixed deposit interest rates are currently at very low levels and are barely able to beat inflation. Still, for many people, bank fixed deposits are their first choice when it comes to parking money. If you are looking to open a bank FD account, here are some smart tips to bring the best out of the bank fixed deposits.

1. Special FD Rates

Bank FDs carry a fixed rate of interest for a fixed tenure ranging from 7 days to 10 years. At times, banks have a special tenure of, say, 444 days, 650 or 700 days as well, offering a slightly higher return for those periods. Further, there are different interest rate options such as monthly, quarterly, half-yearly, or cumulative that one may choose depending on the need.

2. Opt for Senior citizen FD

Senior citizens always get an additional rate of interest of about 0.5 per cent on FD’s in all banks. In addition, if the FD is for 5 years or more, there are special bank fixed deposit (FD) schemes under which there is an additional rate of interest over and above the existing rate of 0.50 per cent on deposits by senior citizens. Effectively, on deposits above 5 years, there will be an additional interest rate of 0.80 per cent or more. If you wish to gain from it, you need to hurry up as the last date is September 30, 2021.

3. Go for Sweep-in FD

Savings account interest is ultra-low in most leading banks. You may opt for a sweep-in deposit in which any amount above a certain threshold limit in the saving, the account is automatically converted into an FD. Effectively, you end up earning a higher rate of interest than what you would earn in the savings account. And, in case you have insufficient funds in your savings account to meet any need, you can simply withdraw from FD without breaking it.

4. Consider tax saving FD

If you are looking to park funds in bank FD for 5 years and also wants to save tax, you can do both in one go. A 5-year tax-saving fixed deposits (FD) qualifies for tax benefits under Section 80C of the Income Tax Act. The maximum that one may invest in the 5-year tax-saving bank fixed deposit for tax benefits in one financial year is Rs 1.5 lakh. As per the rules, such deposits do not allow any partial or premature withdrawal as the lock-in is 5 years but you may opt for monthly or quarterly interest payments. Further, such deposits do not allow any loan facility.

5. Do Laddering

Lastly, spread your FD amount across different tenure. Over the longer time frame, the trend is downward but predicting short-term movements may not be an easy task for anyone. In order to mitigate the reinvestment risk and to ensure liquidity, one should use the ‘laddering’ approach to investing in FDs. When the shortest tenure FD matures, reinvest again for the longest tenure based on one’s need.

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