Fixed Deposits: 6 things to know while opening an FD account

A majority of people in India prefer investing their money in bank fixed deposits (FDs). Bank FDs are safe and secure investment options, even though they come with a lock-in period of 5 years.

In bank fixed deposits, the principal amount is invested at a fixed interest rate. You then earn interest on your deposits, which accrues and grows over time. Getting higher fixed deposit rates can fetch you a higher maturity amount. Hence, choose a bank/lender who is offering the highest FD interest rate.

With FDs, you can also opt for the cumulative option, instead of the regular or interest payment options. It also comes with a wide range of tenures, ranging from as low as 7 days to 10 years.

However, one of the disadvantages of FD is liquidity. Premature withdrawals in FDs are not allowed or come with a penalty. Hence, if you make premature withdrawals from your account, the interest applicable to your investment will be only for the period held. Re-investing funds when available can be at a lesser interest rate if the rates are in the declining trend.

Here are some things to keep in mind while opening an FD account;

Account type: Tax saving fixed deposit can either be held in a single mode or joint mode as per the account holder’s preference. However, the tax benefit can only be claimed by the first account holder, in the case of a joint account.

Interest rate: The interest rate offered fixed deposits vary from bank to the bank even for the same tenure. The interest rate also depends on the period for which the investments are being made. The interest is payable on a monthly or quarterly basis on the deposit amount, which can also re-invested.

Interest payments: Investors can choose from cumulative option or non-cumulative option, to receive their interest payment. Along with the principal amount, interest accrued on the deposit is reinvested and paid at the time of maturity, under the cumulative option. Senior citizens receive a higher rate of interest, as compared to the general public.

Tax: Interest received on a fixed deposit is fully taxable in the hands of the investor. According to an individual’s tax bracket, tax is levied on the interest earned on an FD account. TDS is also applicable to fixed deposits. However, by submitting Form 15G or Form 15H (as applicable) to the bank, one can avoid TDS.

Premature withdrawals: Premature withdrawals on FDs are generally not allowed. Having said that, in case of an emergency, one can break into one’s fixed deposit account before the maturity date. Note that penalty will be charged by the bank on premature withdrawals, the percentage of which varies from bank to bank.

Loan facility: Bank fixed deposit also offers collateral loans. The loan amount is, however, is limited to only a certain percentage of the principal deposit. This percentage varies from bank to bank.

Source: Financial Express