If you wish to multiply your money through a secure investment option, fixed deposit (FD) is your go to instrument. Whether you’re saving towards a goal or creating a fund to prepare for financial emergencies, fixed deposits are a suitable option for someone with low-risk appetite.
In India, fixed deposits are offered by a variety of financial institutions which include banks, non-banking financial companies (NBFCs), companies and post office. The benefits offered by each of these institutions vary as well.
Comparing the options
While there is no single, cookie-cutter answer that applies to all investors, understanding the subtle difference will help you see the merits of each of these options and select the options that work best for your investment plan.
Let’s compare the different fixed deposit options based on interest rates, tenure, deposit amount, tax benefits and liquidity.
# Bank FDs: Banks usually offer an interest rate ranging from 5.75% to 8.25% approximately.
# NBFC/Company FDs: Interest on these FDs start at 7.5% and can go up to 8.70%.
# Post office FDs: These FDs fall somewhere in between the bank FDs and company FDs, with interest ranging from 6.6% to 7.4%.
# Bank FDs: You can open a bank fixed deposit for a period as short as seven days or opt for a tenure up to 10 years. It offers high flexibility.
# NBFC/Company FDs: Typically, the tenure in these FDs range from six months to a few years.
# Post office FDs: You can choose a tenure from one to five years and the interest rate will go higher with the increase in the number of years.
Minimum deposit amount
# Bank FDs: The minimum amount varies from bank to bank.
# NBFC/company FDs: Here as well the minimum amount varies from company to company.
# Post office FDs: Post office FDs allow you to invest as little as Rs 200.
# Bank FDs: Banks offer tax benefits on FDs held for more than five years under Section 80C of the Income Tax Act. However, your funds are locked in during this duration. For FDs with tenure lesser than five years, it is tax-free only if the interest income annually is less than Rs 10,000. Anything above this amount attracts TDS. For senior citizens, the tax exemption limit is higher. You can claim up to Rs 50,000 under Section 80TTB.
# NBFC/Company FDs: These FDs attract TDS only if your total earnings in a year is over Rs 5,000. TDS is deducted at 10%, if you provide your PAN details and it is deducted at 20% if you fail to provide your PAN details.
# Post office FDs: If you opt for a five-year post office FD, you can avail a deduction of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. Senior citizens can avail deductions up to Rs 50,000 under Section 80TTB.
# Bank FDs: Bank FDs allow you to make premature withdrawals at any point typically with an interest rate penalty imposition of around 1%.
# NBFC/company FDs: If you withdraw these FDs within three-six months of commencement, your interest income may not be paid out by certain companies. However, if you make withdrawals upon finishing 15 months from commencement, premature withdrawals are allowed with a penalty worth 2 to 3%.
# Post office FDs: Like banks and NBFCs, post offices impose penalty on premature withdrawal of funds as well. The penalty rate varies basis the tenure of your FD and when you make the withdrawals. The penalty rates are typically specified in the policy document.
These are a few factors you might want to keep in mind in order to invest in the right FD, even though the returns are secure and guaranteed.
(The writer is CEO, BankBazaar.com)