While deciding where to invest your money, fixed deposits are a popular choice with their high returns and tax benefits. But often, opening a first fixed deposit account can be confusing. Here is an article to your rescue with all the frequently asked questions which will tell you everything you need to know about fixed deposits.
What is a fixed deposit?
A fixed deposit is a financial instrument where a depositor invests a principal amount of money with a banking institution or NBFCs for a certain period. There is a fixed rate of interest in case of fixed deposits, and the depositor receives the interest amount on a monthly, quarterly or yearly basis till the maturity date. It provides a higher rate of return than the regular savings account. The depositor gets the principal amount back after the completion of the maturity period.
Who is eligible to invest in a fixed deposit?
Any person, irrespective of their age, caste or creed is eligible to invest in a fixed deposit if the person is a resident of India. Private and Public companies, partnership firms, societies and Hindu Undivided Family can also invest in fixed deposit.
Is there a minimum and maximum tenure for investing in a fixed deposit?
Yes! The minimum tenure for investment is seven days while the maximum tenure can be as long as 10 years. You can opt for the period you wish to invest for.
How does one receive the interest amount?
There are two schemes of investment under fixed deposit – traditional schemes and reinvestment schemes. Under the traditional schemes, the interest amount is credited to the given savings bank account of the individual every month, quarter or year.
Under the reinvestment scheme, the compounded fixed deposit interest rate amount gets added to the principal, and this is again reinvested. You can opt for receiving interests on a monthly, quarterly or yearly basis.
Do the senior citizens get any special interest rates?
Yes! Special rates are available to senior citizens by the majority of financial institutions. The banks follow the definition of senior citizens as per the Income Tax Act, 1961. They can avail the same by directly applying in a fixed deposit or with a co-applicant who isn’t a senior citizen. The rate of interest depends on your bank. In general cases, the rate of interest is 0.5% higher.
Is there a scope to break the fixed deposit before the maturity date?
Yes! You have a facility for withdrawing the funds before the maturity date, in case of any emergency, by availing the premature withdrawal of fixed deposit. In case you do not want to withdraw the entire amount, you can partially withdraw the funds as well.
Is there a penalty for withdrawing the fixed deposit before the maturity date?
Yes! Breaking the fixed deposit before its maturity date leads to your bank to pay you 0.5 % to 1% lower interest rate.
What are the tax benefits associated with fixed deposits?
The interest amount received on fixed deposits is taxable. If you wish to avoid tax deduction, you have to fill out the Form 15G.
Is there a way to avoid the penalty on breaking the fixed deposit?
Yes! You can apply for a load against the deposited amount when you need to break your fixed deposit. This comes with multiple benefits. Not only do you avoid paying the penalty, but you also keep earning interest on the amount invested. The amount of loan that you can opt for depends on your bank or NBFC. Ideally, one can opt for a loan up to 70% to 90% of their fixed deposit amount. To add on, the interest on load is around 2% to 25% higher than the interest rate paid on your fixed deposit in general cases.
What happens to the fixed deposit if the depositor passes away?
In any such case or unforeseen circumstance, the nominee can claim the amount of fixed deposit on the date of maturity. This nominee can only claim the money if the will specifies the same and by showing proper identity proof and other required documents, the nominee can withdraw the fixed deposit and can be withdrawn after the completion of the fixed tenure. In case you haven’t appointed a nominee while creating the fixed deposit, you can do it later on as well, but before the maturity period ends!
Fixed deposits might sound complicated to invest in, but are a very smart choice for investments. It is safe and a preferred way to invest your lump sum amount feasibly.
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