A fixed deposit (FD) is a financial instrument provided by banks or NBFCs (Non-Banking Financial Companies) which provides investors a higher rate of interest than a regular savings account, until the given maturity date.
Fixed Deposits are also known as Term Deposits or Time Deposits. It is called so because you are required to lock in your amount for a certain period of time.
As FD is a long-term investment source, you must be sure before you lock in your money. We generally think that we need large amount to invest in an FD to truly reap the interest benefit but you can start an FD with as little as Rs.1,000.
In addition to this, in Indian households, a Fixed Deposit is looked at as a provision for the future. They are often kept aside and used for purposes like funding for higher education, for marriage, or for buying a new car.
Looking at how major financial goals of Indian households align with investing in an FD, it is important to look at some factors that you must consider before investing in an FD.
The time period for which you
lock in your money is the first thing that you must consider before investing
in a Fixed Deposit. An FD tenure can range from a couple of weeks to several
years. That is why, you must analyse your financial goals, make necessary
provisions, and allocate money accordingly- before investing in an FD.
Different banks offer different interest rates on their fixed deposits. Fixed deposits of small finance banks and non banking finance companies give higher interest rate than bank fixed deposits.
Proper research also gives you knowledge like knowing that all senior citizens get an additional 0.5% interest on their invested amount.
The interest earned via a Fixed Deposit on the amount invested gets added to Income from Other Sources, and is taxed as per as your tax slab. Before paying interest to the depositor, the bank with whom the FD is maintained, must deduct TDS (Tax Deducted at Source) of 10%. In order to avoid TDS, a depositor may be required to submit Form 15G or Form 15H to their banker.
There may arise situations, when
you are in dire need of funds. Hence, in case of emergencies, banks allow you
to break your FD and withdraw your money prematurely. In doing so, a 1% penalty
is charged on the amount that you have invested. Some banks do not charge or penalize
the depositor if they use that money to invest in another long-term deposit in
the same bank.
Even though an FD is a term deposit and the amount is locked in, you are eligible to take a loan against your deposit from the bank. If you do so, your deposit continues to earn the original rate of interest. The loan can be availed up to 90% of the invested amount, and the interest on it is to be paid to the bank. Such loans usually bear no processing charges.
Hence, if you have analysed all these factors, and are sure of your decision- go out there and get yourself a fixed deposit in your name- in order to financially secure yourself.
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