Many Indians consider fixed deposits to be an ideal investment, as it’s safe and offers decent interest along with capital protection. Fixed deposits are easy to avail and require minimal documentation.
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Listed below are some of the tips through which you can maximize interest income on fixed deposits:
1. Shop Around: The interest rates are not fixed and vary across banks and financial institutions. To get the best deal, try and evaluate the different interest rates offered by banks. While comparing, keep different aspects in mind like FD tenure, premature withdrawal penalty, cumulative or non-cumulative FD and so on. You must also consider investing in fixed deposits through the online route.
2. Split Your Money: If you have enough money say Rs 4 Lakhs, then instead of investing a lump sum in a single FD, try and split it across FDs in banks. You can benefit by splitting your money across separate FDs with different maturity terms, so that you do not have to break the entire deposit at once.
You can break any one deposit and pay a premature penalty, instead of paying a penalty on the entire deposit. Currently, banks are offering an insurance cover of Rs 1 Lakh on each fixed deposit through Deposit Insurance and Credit Guarantee Corporation or DICGC.
Therefore, you can split your money (Rs 4 Lakh) into four separate fixed deposits at different banks and stay insured. All commercial banks which include foreign banks, local area banks and regional rural banks (RRBs), are insured by the Deposit Insurance and Credit Guarantee Corporation.
See Also: What is Meant by Fixed Deposit?
3. Opt for Multiple FD Accounts with Different Tenures: Interest rates paid by the banks on FDs depend on the tenure. For example, if you have opted for tenure of 5 years, you are likely to get better rates.
To counter the problem of fluctuating interest rates, you can invest in FDs across maturities. Invest small amounts across FDs with tenure of 1 year and some with tenure of 3 to 5 years. You can reinvest the maturity amounts as per the prevailing rates of interest.
4. Tax Liability on FDs: Fixed deposit allows you earn interest income and grow your money. It provides a better interest rate than a bank savings account. So, FDs offer an ideal option for investors to park surplus funds as well as earn interest income.
However, the interest income on FDs is fully taxable. If interest income is more than Rs 40,000 in a financial year (It’s Rs 50,000 for senior citizens), then TDS is deducted from interest income on FDs.
5. Tax Saving FDs: Tax saver FDs refer to a type of fixed deposit that fetches you tax benefits, provided the deposits are locked-in for a period of 5 years. A lock-in period means you cannot withdraw deposits before the maturity period. 5 Year Tax saving FD is a great investment option, as you enjoy tax deduction on the interest income under Section 80C of the Income Tax Act.
Enjoying tax deductions through 5 year tax saver FD, increases returns. However, you must consider your financial standing before investing in these tax saving investments, because if you withdraw the deposit amount before maturity, you will not get any tax benefits.
See Also: Fixed Deposit Interest Rates 2019
6. Premature Withdrawals Attract Penalty: The lock-in period is an important feature of fixed deposits. The lock-in period helps money grow through the compounding benefit.
If you withdraw the money before maturity, you are liable to incur a pre-payment penalty. The penalty is generally 1-2% of the interest earned on FD. So, to earn better interest income on FDs, you must avoid premature withdrawals.
7. Reinvestment of Interest: The fixed deposits allow your money to grow by reinvesting the interest. This method is known as compounding, where the interest income is added to your existing principal amount. The total amount i.e. interest income along with the principal amount is paid on maturity. Therefore, if your financial goal is to generate higher returns, then opting for the compounding option is great.
Compounding is return on returns. Your return earns more returns and put you on the path to wealth.
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