Fixed deposits can help you secure your hard earned money for long durations while giving you higher risk-free returns on your money than regular savings account. With the stock market performing phenomenally, the popularity of fixed deposits have declined but, they are regaining ground at a gradual pace.
As the name implies a fixed deposit is a financial instrument meant for people who want to deposit their money with banks for a fixed duration ranging from 15 days to 5 years and above, and earn a higher rate of interest on their money than conventional savings account. After the maturity of fixed deposit the investor gets a return which is equal to the principal plus the interest earned on this principal over the entire duration of fixed deposit.
Fixed deposits have been very popular among investors and keeping this fact in mind banks in India have a wide variety of fixed deposit schemes to suit almost every need.
Interest rates on regular fixed deposits
At current prevailing rates a regular fixed deposit can earn you an interest up to 8.75% and senior citizens who opt for such a fixed deposit scheme are eligible for an additional 0.5 percent increase, which makes the effective interest rate 9.25% for certain fixed deposit intervals.
Fixed deposits though are invested for a certain time period but they can be a source of money and funds can be withdrawn partly, from fixed deposits in times of need. Depending on the bank's policies, this withdrawal may or may not attract penalty.
Features of a regular fixed deposit
The interest rates on regular fixed deposits are time based and fixed deposit for longer duration attract better interest rates. For example from HDFC Bank, a fixed deposit amount below 15 lakhs of 15 - 29 days will earn 5.50% interest rate for general public and 6.00% for senior citizens. For the same amount , a fixed deposit of 100 - 101 days will earn you an interest rate of around 6.75% and 7.25% if you are a senior citizen. Similarly, for an amount below 15 lakhs a fixed deposit between the period 2 years 15 days - 2 years 16 days will give a 8.75% interest rate return and this will be 9.25% for senior citizens.
The power of compounding on your side
The earning potential of fixed deposit is greatly increased by the power of compounding. If the fixed deposit allows the potential to earn compound interest by reinvesting the principal amount along with the interest earned during the period, it can dramatically increase the amount you will get at the maturity of fixed deposit. To get the maximum returns one should compare fixed deposit schemes from various banks before settling for one.
If you have surplus funds, instead of keeping them in your savings account and thereby earning a paltry interest rate, you can add them to your fixed deposit. This way the funds will earn a much higher rate of interest.
How to open a fixed deposit?
The process of opening a fixed deposit is very simple and this is accessible to almost all section of Indian population. For example: resident individuals , Hindu undivided families, sole proprietorship firms, partnership firms, limited companies, trust accounts etc. all can open fixed deposits. Banks in India have a certain minimum initial deposit limit like Rs. 10,000 to open a fixed deposit and the value of fixed deposit can be increased in multiples of a minimum amount (for example Rs. 5000). These limits can vary and also depend upon rural, urban or semi-urban nature of population. The limits are very low for rural areas so that even those with a low incomes can open a fixed deposit.
Calculation of interest rates and tax deductions on regular fixed deposit
How the interest rate is calculated on your fixed deposit varies from bank to bank. For a fixed deposit of six months or above the banks may calculate the interest on a quarterly basis. In case the tenure of fixed deposit is less than six months the interest is calculated at maturity as simple interest. The compounding factor or interest for re-investment is calculated on a quarterly basis.
Every fixed deposit is subject to the Indian income tax regulations prevalent from time to time. Keeping these regulations in mind banks deduct tax at source from your fixed deposits and issue you a TDS certificate for the same.
Regular fixed deposits bring increased returns on your savings as compared to a regular fixed deposits. These are great instruments for investing money. The fact that they can be used as guarantee for loans and financial transactions make them even more valuable.