Fixed deposits (FDs), also known as term deposits, are one of the best options for people looking for an assured income as they are risk-free. In FDs, a lump sum amount is locked-in for a specific period. Investors can choose tenure usually in the range of 7 days to 10 years. FDs are offered by commercial banks, small finance banks as well as non-banking financial companies (NBFCs).
Here are 5 things one should consider before investing in a fixed deposit:
Deciding the tenure is very important in case of FDs because if investors withdraw the amount before maturity, they will have to pay a penalty, which lowers the total interest earned on the deposit.
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"Investors should decide very carefully whether they’ll need a substantial sum on money in the foreseeable future or not. They should opt for tenure of 1 to 2 years in case they would need money. In case, an investor is unsure about the future requirements, he/she can distribute the money among multiple FDs with varying tenures," says Rachit Chawla, founder and chief executive officer, finway and director- technology and finance, Risers Accelerator.
The RBI issues the guidelines that set the limits of interest rates the banks can offer, but within those limits, the banks can offer different interest rates. Therefore, interest rate offered on fixed deposit varies from bank to bank, and investors should compare them before investing.
Besides, banks generally offer higher interest rates to senior citizens on FDs. So, if the investors or anyone in their family are senior citizens, they can benefit from it.
If the interest accrued on an FD exceeds Rs 10,000 in one financial year, then that interest becomes subject to TDS deduction – which is 10 percent of the total interest earned. However, if the income is not taxable, then investors can submit form 15G/H and claim exemption from tax, according to Chawla.
Interest Pay-out Frequency
Earlier, the banks used to offer quarterly and annual interest withdrawals but now, some banks are offering monthly withdrawals as well.
"If an investor is looking to use the interest earned on FD as a source of income, then he/she should consider the interest pay-out frequency of the bank," suggests Chawla.
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First Published: IST