How to make the most of your bank fixed deposits

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Bank fixed deposits (FDs) continue to be one of the most preferred instruments to park money for conservative investors. While FDs are not suitable for generating long-term wealth because of negative real returns, they are suitable to park liquid cash from the objective of saving the capital. If you are looking to invest in a fixed deposit, make sure you consider the given points and make an informed decision.

Tenure

You can chose a tenure from as short as 7 days to as long as 10 years. Depending upon the amount you want to invest and your financial needs you can pick the tenure. However, if you’re investing a lumpsum, experts suggest that investors should break the amount and split it across different tenures. To put it in perspective, if you are looking to invest Rs 15 lakh in a FD, instead of a single FD, split the amount into 3 FDs of Rs 5 lakh each for across tenures – let’s say, 1 year, 2 year and 3 year. When the one year deposit matures, renew it for 3 years and so on. This way, you can utilise your funds efficiently and avoid premature withdrawals in case of emergencies.

Interest rates

Different banks offer different interest across tenures. The rate of interest remains fixed till maturity once the deposit is made. Usually, small finance banks, NBFCs offer higher interest rate in comparison to other big lenders. Senior citizens are offered a little higher interest rate. Also, those who need regular income can opt for monthly, quarterly, half-yearly or annual interest payments.

Premature closure

In case of premature withdrawal, you will get the interest on pro rata basis. While some banks have zero penal charges for premature withdrawals, deposits with certain banks are subeject to a penalty. In most banks banks, penalty for premature closure doesn’t apply for tenure ranging between 7 and 14 days.

Income tax

Interest earned on a bank FD is has to be reported as ‘income form other sources’ while filing the income tax return and is fully taxable. Interest earned over Rs 10,000 a year from FDs attracts 10% TDS if form 15 G/H has not been submitted.

Insurance

Bank deposits are insured under the RBI’s Deposit Insurance and Credit Guarantee Corporation (DICGC). Under this insurance scheme, your bank deposits up to Rs 5 lakh across branches of the bank are insured. All funds held in the same type of ownership at the same bank are added together before deposit insurance is determined. If the funds are in different types of ownership or are deposited into separate banks they would then be separately insured.