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Why is it necessary to invest in a fixed deposit?

    IndianMoney.com Research Team | Tuesday, April 06,2010, 07:46 PM
 

The term "fixed" in Fixed Deposits denotes the period of maturity or tenor. Fixed Deposit, therefore, pre-plans a length of time for which the depositor decides to keep the money with the Bank and the rate of interest payable to the depositor. Rate of interest differs from Bank to Bank. Normally, the rate is highest for deposits for 3-5 years. This, however, does not mean that the depositor loses all his rights over the money for the duration of the tenor decided. Deposits can be withdrawn before the maturity period also but the amount of interest payable to the depositor, in such cases goes down.

Every Banks offer fixed deposits schemes with a wide range of tenures for periods from 7 days to 10 years. Therefore, the depositors are supposed to continue such Fixed Deposits for the duration of time for which the depositor decides to keep the money with the bank. However, in case of any emergency, the depositor can ask for closing the fixed deposit in advance by paying a penalty.

Investing in Fixed Deposits

A fixed deposit account allows you to deposit your money for a set period of time, thereby earning you a higher rate of interest in return. At the end of maturity period the depositor gets its principal amount plus interest earned over the maturity period. Fixed deposits also give you a higher rate of interest than a savings bank account. It is one of the oldest and most popular forms of investment across India.

Benefits of FDs

Fixed deposit offer better returns than saving accounts to depositors. Moreover, there are several forms of fixed deposits such as recurring deposits where depositors pay a fixed amount at regular intervals and get back the amount with accumulated interest at the end of the prescribed period.

  • You can avail loans up to 85% of the principal amount at a reasonable interest rate.
  • Variable deposit periods ranging from 6 months to 120 months
  • You generally get interest once in 6 months

Downsides of FDs

Though FDs give depositors a fixed return on their investments, there are certain drawbacks of FDs.

  • FDs are not so liquid i.e. it cannot be withdrawn before it expires. However, there is a provision to cancel FDs which invites a penalty of 1-2% depending upon the bank.
  • Interest earned after FD maturity is taxable.

Comparative chart of Fixed Deposits

Bank

Interest Rate

Minimum Balance (Rs.)

ICICI

6.25%

10,000

HDFC

6.5%

10,000

Yes Bank

6.25%

10,000

IDBI

6.6%

10,000

SBI

6.25%

5,000

IndusInd

6.75%

10,000

Indian Overseas Bank

6.5%

10,000

Tax deduction

Banks should deduct tax at source on interest paid in excess of Rs. 5000 per annum to any depositor. This is not per deposit but per individual.

You are eligible for tax deduction if the term of investment is more than 5 years.

Fixed deposit Bond

While opening a fixed deposit account, the bank must issue a fixed deposit Bond that should state the following things on its face :

  • Date of issue
  • Due date
  • Amount
  • Rate of interest
  • Period of deposit
  • Amount at maturity

Early withdrawal

Sometimes a customer may want to withdraw his deposit before maturity. In such case, the customer would have to request the bank to do so. Banks are permitted, at their discretion, to allow early withdrawal and they can charge a penal interest for early encashment. The rate of interest that will be paid is the rate for the period the deposit has been with the bank.

Early withdrawals invite penalty of 1-2% depending upon the bank. The Reserve Bank states that penal interest must not be charged if the deposit is reinvested in a fresh deposit immediately.

Maturity

The deposit matures at the end of the period for which it has been placed. On maturity, the depositor can instruct the bank to renew the deposit. The bank cannot do so without the customer’s instruction. If the depositor does not want to renew the deposit, he can ask for it to be paid to him either by a cheque/ draft or credited to an account he has.

Normally this instruction would be in the account opening instructions. If the depositor does not renew or claim the deposit on its maturity, the deposit will be designated as an overdue deposit in the books of the bank. The bank cannot close and repay the deposit if the depositor does not make a demand. If the deposit matures on a Sunday/ holiday/ any nonworking days, the bank should pay interest at the originally contracted rate on the deposit amount for the Sunday/ holiday/ non business day. The deposit would be paid back on the succeeding working day.

Renewal of overdue deposits

Banks can renew deposits at an interest rate prevailing on the date of maturity provided the depositor approaches the bank within 14 days from the date of maturity of the deposit; if the application is made after 14 days the rate of interest must be the rate prevailing on the date of renewal of deposit. Banks are free to decide the rate of interest between the date of maturity and the date of renewal.

Advance on Fixed Deposits

Banks may grant loans on the security of the fixed deposit but they should maintain a reasonable margin on any advance or facility given against the security of a term deposit. Banks are free to charge a rate of interest on such lending without reference to its prime lending rate (BPLR). If the term deposit is withdrawn before completion of the prescribed minimum maturity period it must not be treated as an advance against the term deposit and interest must be charged at the rates prescribed by the RBI.

Joint Holdings

Fixed deposits may be in the name of an individual or in the joint names of two or more persons. In case of joint holdings, if one of the joint depositors requests for premature withdrawal, it should be done only after getting the approval of the other depositors. At the same time if one of the joint depositor wants a loan against a fixed deposit, it should be given only after all the other joint holders have signed the request. Any one joint depositor’s request should not be entertained in such accounts; all the requests should be signed by all the joint holders.

Loss of Fixed Deposit Receipt

A fixed deposit receipt is not negotiable or transferable. If the receipt is lost, customers can ask for a duplicate. This is because banks are firm on fixed deposit receipts to be discharged and surrendered before payment is affected.

Therefore in a joint holding account, all the holders should request for a duplicate receipt in writing and execute a letter of indemnity to issue a duplicate. A note should also be made in the bank’s records that a duplicate has been issued.

Repayment

If the deposit with interest is Rs. 20,000 or more the repayment must be by an account payee cheque. It can also be made by crediting to the current/ savings account of the depositor.

Repayment of interest or principal should not be made to the account of another person and it is usually made in the name of the first named person.

Tips to remember while going for a Fixed deposit

  • Decide in advance, the period for which he is ready to invest.
  • Shop around for the best rate of interest available.
  • Avoid Banks which do not have a long history
  • If you need a part of the money before your deposit matures, seek your banker's advice whether taking an overdraft will be beneficial.
  • You need to be very careful while entrusting your money to finance companies which promise high rates of interest.

IndianMoney.com Research Team

The research team at IndianMoney.com comprises of certified and experienced professionals who share the company's vision to make every Indian financially literate by equipping every Indian with right and unbiased advice. IndianMoney.com research team provides newsletters, articles, videos and FAQs on various financial products and concepts only to help you make wise financial decisions.

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