Fixed Deposits: More attractive than you thought!

Fixed Deposits being flavour of the season with their attractive interest rates and terms, I will discuss in this article how can you get maximum benefit out of this instrument with respect to tax as well as returns.

By investing in fixed deposits with banks you can avail tax benefit under Section 80C, moreover you need not commit your funds for a very long period. There is an assurance in advance about the returns, which is fixed for entire tenure of the investment, implying your investment is risk free.

This new product of investment i.e. term deposit scheme popularly known as fixed deposit scheme offered by banks was introduced in the budget of 2006 with effect from 1st April 2007.

Features of Investment:

The maximum amount upto which a person can invest under this scheme is capped at Rs. 1 lac. The minimum amount is also capped at Rs. 100. You can invest further money in multiple of Rs. 100/-.

The fixed deposit under this scheme can either be opened in single name or in joint names of not more than two persons – one of whom can even be a minor. But the deduction available for investment under Section 80 C can only be claimed by the first holder. Hence you should ensure that the person contributing the money is named as first holder of such FDR ( Fixed Deposit Receipts).

Restrictions on pledge and early encashment:

You would recollect my earlier article in DNA on 15th Feb 2011 on National Saving Certificates, where I had mentioned that the NSC can be pledged with government, banks including co-operative bank or cooperative credit Societies for taking a loan.
But this facility of pledging and taking loan against these bank fixed deposits is not available.

Even you cannot go for premature encashment of these deposits before completion of the period of five years. So it is important that you plan in such a manner that you do not need this money for next five years. However the deposit can be transferred from one branch of the same bank to another branch of the same bank ( and not other bank). So if you are moving from one city to another, your fixed deposit can move with you.

Though the fixed deposit has a lock in period of five years but in case the first holder or the sole holder dies during currency of the term deposit, the second holder or the legal representative or nominee of the deposit can request for premature withdrawals of deposit under this scheme.

Rate of interest

These fixed deposit schemes fare better than National Saving Certificates where the rate of interest is only 8% whereas these FDs presently offer you interest upto 9.25% and that too for shorter term of five years over six years of NSC. These FDs are even better than deposits under Senior Citizen Scheme where the highest interest being offered is 9% whereas FDs offer 9.75%.

The rates of interest currently offered by major banks on these deposits are given in the table:

Bank Name General Senior Citizens
5 Years Above 5 years 5 Years Above 5 years
Axis Bank 8.25 – 9.25 –
HDFC Bank 8.25 – 8.75 –
ICICI Bank 8.50 – 9.00 –
State Bank of India 8.50 8.75 9.00 9.25
Kotak Bank 9.25 9.25 9.75 9.75
Punjab National Bank 8.50 8.50 9.00 9.00
Union Bank of India 9.00 8.50 9.50 9.00

You should know that the interest earned on such fixed deposits is taxable like NSC’s interest and interest on senior citizen Deposit Scheme. The bank will deduct tax at source on the amount of interest given to the investor.

One more attractive feature of these fixed deposits as an investment avenue is that the rate of interest is fixed at the time of making the investment and is not subject to any change in the future. Therefore it helps you in planning your future cash flows more accurately to meet your future cash requirements.

The other beneficial feature is its tenure of five years. This is helpful in case you do not want to block your money for longer period like in PPF account where the money remains normally blocked for 15 years. This is particularly important for you in case you need to have access to your money for any short-term goal in the near future like buying a house or providing for children’s education or marriage expenses.

Other features:

For making investment in FDs you need to have PAN which shall be mentioned on the FDR with other details like name and address of the person making the deposit. You should be careful about preserving these FDRs because in case you lose it or it is destroyed, you will have to follow an elaborate procedure for issue of duplicate FDR. This involves furnishing indemnity bonds and getting either sureties or bank guarantee for issue of such duplicate FDRs.

Nominations:

One can appoint one or more persons as nominee to receive the money in case of death. The nomination form can be filled either at the time of making the deposit or any time thereafter. However in case the deposit is made for and on behalf of a minor, no nomination can be made in respect of such deposits.

In case of death of the deposit holder the nominee can claim the money from the bank on the basis of death certificate of the original holder. In case the nomination is made in favor of more than one person, all nominees will have to sign the necessary documents in order to claim the money from the bank in respect of the deposits held in the name of the deceased.

I hope you are able to make up your mind in favour of long term Fixed Deposits.

Balwant Jain is CFO, ApnaPaisa.com, a price comparison engine for loans, insurance and investments. He can be reached at balwant.jain@apnapaisa.com.

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