If you want to ensure the safety of capital as also to get the best rate of interest, then you need to keep a few important things in mind before putting your hard-earned money in fixed deposits.
Bank fixed deposits (FDs) are one of the most popular investment instruments among risk-averse investors, particularly senior citizens. That is because they guarantee principal repayments and interest income at the booked rate regardless of any changes in the card rate during their tenure. However, despite being considered as safe avenues, FDs are not 100% risk-free in some cases.
Therefore, if you want to ensure the safety of capital as also to get the best rate of interest, then you need to keep a few important things in mind before putting your hard-earned money in fixed deposits.
Here are 5 things to look at before opening an FD account:
1. Safety of Capital
The twin features of capital protection and income certainty are the prime USPs of opening a fixed deposit account with a bank. While PSU and large private sector banks are considered to be much safer, the degree of capital protection will also depend on how other banks have been categorised by the RBI. Currently, “banks listed as scheduled banks are covered under the deposit insurance program of DICGC, an RBI subsidiary. This insurance program covers cumulative deposits of each depositor in their fixed, recurring, current and savings accounts of up to Rs 5 lakh with each scheduled bank in case of bank failures. Hence, depositors seeking the maximum level of capital protection for their fixed deposits should inquire whether the concerned bank has been categorised as a scheduled bank,” says Sahil Arora, Director, Paisabazaar.com.
2. Issuer Credibility
Though fixed deposits are generally considered as safe instruments, they are not 100% risk-free. The recent crisis in some NBFCs and co-operative banks has indicated why depositiors should be extra cautious while parking their money in a fixed deposit.
“It is, therefore, always advisable to go for a commercial bank FD as these deposits are insured by DICGC. Though cooperative banks offer higher interest rates on fixed deposit, it is better to avoid them. If you are planning to go for an NBFC fixed deposit, you need to consider the financial health and credit rating of the company,” advises Pranjal Kamra, CEO, Finology.
3. Interest rate
Interest rates of bank fixed deposits vary widely depending on the bank and the tenure chosen. At present, some small finance banks and private sector banks are offering highest FD slab rates of 7%-8.25% p.a., which is around 200-250 bps higher than the highest FD slab rates offered by public sector banks and large private sector banks. Remember that just like PSUs and other private sector banks, all small finance banks have also been categorized as scheduled banks by the RBI.
Thus, “having cumulative deposits, including fixed deposits component of up to Rs 5 lakh with each of these small finance banks are equally safe as opening fixed deposits with PSU and large private sector banks. Also, depositors seeking the maximum level of safety for their fixed deposits can still benefit from higher FD rates by spreading their FDs across banks offering high yield FDs in such a way that their cumulative deposits in each of these banks does not exceed Rs 5 lakh,” informs Arora.
Kamra says, “The interest rate offered depends on the deposit tenure, investment amount and also varies from bank to bank. Here you also need to choose the interest payout option. If you wish to get a regular income, choose a non-cumulative interest payout. For investors, who don’t require regular income, it is better to go for the cumulative interest option as banks generally offer higher interest on cumulative payout schemes.”
4. Liquidity and time horizon of financial goals
Depositors should factor in liquidity and time horizon of their financial goals while choosing their FD tenure. Ignoring it can force them to close their FD deposits prematurely in case of financial exigencies or maturity of an overlooked financial goal. Premature withdrawals of bank FDs can cost the depositors premature withdrawal penalty of up to 1% on the effective interest rate, which is usually the lower of the original booked FD interest rate or the FD interest for the period for which the FD has been into effect at the time of its opening.
Therefore, “select your deposit tenure considering your investment goals. In case you break your FD before the deposit tenure, the bank levies a penalty that will reduce the total interest earned on your deposit,” says Kamra.
The interest income on your fixed deposit is taxable as per your income tax slab. Earlier (till AY 2019-20), TDS was charged at the rate 10% in case the interest income on an FD exceeded Rs 10,000 in a financial year. However, in the interim budget 2019, the TDS deduction limit on fixed deposits was increased to Rs 40,000 annually (applicable from AY 2020-21). For senior citizens, the threshold limit for TDS on interest is Rs 50,000. Moreover, they enjoy deduction under Section 80TTB up to Rs 50,000 for all interest received from banks, post offices, among others. including FD interest. Also, under the existing I-T rules, the TDS rate on FD interest is 20% if your bank does not have your PAN card details. However, if your income is below the taxable range, you can submit Form 15G and Form 15H to the bank in order to avoid tax deduction on your FD.