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How Fixed Deposit Can Help in Saving Money?

IndianMoney.com Research Team | Posted On Tuesday, April 09,2019, 05:01 PM

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How Fixed Deposit Can Help in Saving Money?

 

 

Saving money is very important to both salaried and the self employed. A Rupee saved is a Rupee earned. Saving is easier said than done. Each individual is willing to save, but somehow ends up spending each and every rupee on various commitments. This can prove to be a wrong step in the long run, as you won’t have money in hand, when you need it the most.

Keeping emergencies in mind, you must always have a sizeable lump sum at your disposal, to avoid a financial crisis. Keep track of spending and ensure that it is way lower than your income, this not only facilitates saving and contributing towards building a corpus for emergencies, but also helps in avoiding loans/debt. The basic rule for saving money is making a budget and sticking to it. 

Saving for the sake of saving, might not motivate you. Set short and long term financial goals. By setting goals, you would be forced to save. If you don’t have a lump in hand, then you can consider investing in POMIS, RD, mutual funds through SIP and so on. If you have a lump sum, then you may consider options like fixed deposits and mutual funds. If you are looking for the safest investment option with almost no risk, then fixed deposits are apt for you.

Want to know more on fixed deposits? We at IndianMoney.com will make it easy for you. Just give us a missed call on 022 6181 6111 to explore our unique Free Advisory Service. IndianMoney.com is not a seller of any financial products. We only provide FREE financial advice/education to ensure that you are not misguided while buying any kind of financial products.

How Fixed Deposit Can Help in Saving Money?

What is a Fixed Deposit?

Fixed deposit is a financial instrument offered by banks and NBFCs, under which you deposit money over a fixed term to earn interest, which is much higher than that of a normal savings bank account. Investing in fixed deposit is one of the safest investment options as there are not many instances of banks defaulting on fixed deposit. Also, investing in fixed deposit is the most traditional form of investment.

The term of fixed deposit varies from 7 days to 10 years. Generally, banks and NBFCs offer a higher rate of interest on larger deposits and longer maturity terms. In most banks and NBFCs, the interest earned on fixed deposit is compounded on a quarterly basis. However, the interest is not paid out till maturity. The corpus at maturity would have both the interest and principal invested. On maturity, you can either withdraw the amount or reinvest in another FD.

SEE ALSO: Fixed Deposit Interest Rate

Reasons for investing in a Fixed Deposit

Bank fixed deposits are considered one of the safest investment options. You invest a lump sum for a specified time. The rate of interest offered on fixed deposits depends on the tenure and principal. The fixed deposit interest is paid out in two ways: i) Cumulative deposits under which the interest is calculated on quarterly or annual basis, and the interest is paid out at maturity. ii) Non-cumulative deposits, under which the interest is calculated annually, quarterly or at discounted monthly rate.

The corpus received on maturity can be utilized for purchasing a land or house, children’s education and marriage and other investment options like mutual funds and stocks, but these are risky unlike fixed deposits. Below mentioned are a few reasons for investing in fixed deposits:

Premature Withdrawals And Closures:

Fixed deposits allow you earn higher interest rate than a savings bank account; this is because banks and NBFCs use your funds as a part of their cash flow. For all premature withdrawals, banks and NBFCs levy penalties. The principal invested remains unaffected, but the interest earned would be cut by a certain percentage. This option of premature withdrawals offers liquidity which makes FD a popular investment option. You can close your fixed deposit account and take out all the money in case of an emergency.

Tax Saving Fixed Deposits:

As per the Income Tax Act, enacted in the year 1961, interest earned on FD of up to Rs 40,000 a year is exempt from TDS. It is Rs 50,000 for senior citizens.

In 5 year tax saver FDs, the principal invested enjoys Section 80C deduction. Your investment is locked for 5 years under a tax saving fixed deposit. You will not be able to withdraw the money from these FDs till maturity and you cannot avail loans and credit cards against tax saving FDs.

Preferential Interest Rates For Senior Citizen:

​Most banks and NBFCs offer higher rate of interest on FDs. Generally, banks and NBFCs offer higher interest rate to senior citizens (This is usually 0.5% higher). The FD interest rate for senior citizens varies across banks and NBFCs.

Loan Against Fixed Deposits:

This is one of the most important factors, which makes investing in fixed deposits, very attractive. You can avail secured loans and secured credit cards by furnishing FD investments as security or collateral. Secured loans are offered at a much lower interest than unsecured loans. 

How Do You Save Money By Investing In Fixed Deposit?

Investing surplus funds not only helps earn returns, but also saves money.

  • Fixed Deposits facilitate saving money over a longer tenure, as it does not offer premature withdrawals without penalties. Penalties levied on premature withdrawals make an investor refrain from withdrawals.
  • With fixed deposits, you earn an interest rate which is way higher than that of a savings account.
  • You can avail loans against fixed deposit. The LTV offered on loans against FDs would be 70 - 90%.
  • There is an option of getting interest either at maturity, monthly, quarterly and annual basis.
  • You can avail credit cards against FDs and the credit limit of the card would be a maximum of 90% of the FD amount. 
  • The interest income earned on fixed deposit of up to Rs 40,000 a year is exempt from TDS.
  • Investing in tax saving FDs offer tax deductions under Section 80C of the Income Tax Act.

FD Interest Rate April 2019

The below table shows the interest rate offered by popular banks and NBFCs on fixed deposit:

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