Know all about Fixed Deposit and related features of Fixed Deposits like Maturity, Tax, Renewals, Nominees etc...

1. Fundamentals of Fixed
Deposits
By Narendra Pratap

2.  As an Indian investor you’re bound to have a
certain amount of money invested in a bank
fixed deposit. Financial wisdom apart, it is
practically a tradition to do so in India. While
the growth of alternative channels like the
equity and bond markets have turned
investment preferences over the last couple
of decades, it is still useful to keep a tab on
this age-old product.

3. Deposit Period  They can be held for short, medium or long-terms
i.e. for as low as a couple of weeks to
as long as a decade.

4. Security
 They are safe, low-risk investments (which
is probably why grandma loves ‘em). It’s
also why their returns are lower than riskier
products like shares. They are protected by
the DICGC (Deposit Insurance and Credit
Guarantee Corporation) ‘cause everyone
needs a hero in case the bank defaults on
payments.

5. Returns/Intere
st Rates
 Here’s the kicker! - Returns are guaranteed.
 Interest rates are fixed for the entire term of
the deposit and can either be paid-out
regularly or reinvested.
 Compounded interest provides more returns
(duh! - ideal for investors). Encasing returns
provides a regular income stream (ideal for
grandma - her pension just doesn’t cut it at
the flower show).
 Public banks usually offer higher rates than
private banks since rates vary according to a
bank’s liquidity needs and market conditions
and its no secret that public banks are
always strapped for cash.

6. Liquidity
 This isn’t the right place to stow funds if its
for the missus’ birthday.
 Money is locked-in for a fixed term thus
restricting liquidity and should only be a
preferred investment channel for surplus
funds.

7. Tax
 Yes, there’s no escaping it. Tax is deducted
at source (TDS) for interest earned above
Rs.10,000 @ 10%.
 Taxes are never that simple….
 TDS is deducted @10% but taxability
depends on the the depositor’s relevant tax
bracket.
 So, if the interest earned on a deposit in one
year is Rs.30,000, the TDS = Rs.3,000. But
if the depositor’s total income puts him in
the 30% tax bracket, the total tax payable is
actually Rs.9,000. The difference i.e.
Rs.9,000 - Rs.3,000 = Rs.6,000 will have to
be declared and paid when filing returns.
 Tax-saving FDs are exempt from tax
provided the minimum period of holding is 5
years. (You have to fight that itch to make a
withdrawal during this period).

8. Renewal
 The deposit can be renewed by giving
instructions to the bank to do so. A new
tenor can be chosen at the latest interest
rates.
 For the lazy investor, who doesn’t provide
instructions, the deposit is automatically
renewed a.k.a. auto renewals.
 The new deposit will be for the same period
as the one that is maturing. The interest
rate applicable will be as per the rates in
effect on renewal. (This isn’t good news if
the new rate is lower than the old one).

9. Withdrawal
 That’s a no-go!
 If allowed, a penalty is charged, usually
between 1% - 2%. This reduces the interest
earned.
 Or hold out … and on maturity, the entire
proceeds accrued can be withdrawn -
 In cash for amounts up to Rs.20,000
 By cheque or transfer to savings account for
amounts above Rs.20,000

10. Nomination
 Up to 2 nominees can be named at any time
during the period of holding. Nominees
receive the funds upon death of the
depositor.
 In case of joint accounts, an “either or
survivor” instruction should be given.

11. Capacity /
Holders
 Sharing is caring! - FD accounts can be held
individually or jointly.

12. Sweep-in/Flexi
Deposits
 Can’t wait to break open the piggy bank?
 Holders can withdraw the amount of interest
earned on the deposit through an ATM
transaction or direct fund transfer. The
balance becomes, in effect, a new deposit.

13. Non-
Residents
 NRIs can hold fixed deposits in India
through NRO/NRE accounts (everyone can
play). Interest rates usually differ from
domestic FD rates, though. It may or may
not be worth the effort depending on the
exchange rate.
 NRO accounts - for funds held in Indian
rupees (INR); NRE accounts - for funds held
in foreign currencies.

14. Online
Application
 An easy, quick and convenient way to open,
maintain and track fixed deposit holdings.
 FDs can be applied for online either through
the bank’s website or through financial
services portals like BankBazaar Fixed
Diposit
Section(http://www.bankbazaar.com/fixed-deposit.
html).
 Allocating funds to fixed deposits isn’t a bad
idea given all the great features it has. How
much, though, depends on an individual’s
liquidity needs and risk-appetite. Timing is
also important. Getting locked-in at a low
rate only to find out that returns have gone
up subsequently can be a total downer.