5 MinsJan 09, 2023
Even in this day and age of financial engineering and exotic market-linked financial products, a majority of Indian investors––particularly the risk-averse–––prefer investing in a bank FD (also known as a Term Deposit).
Risk-takers as well, strategically make it a point to usually allocate a portion of their investments to a bank FD. This is because a bank FD earns steady, secured (DICGC insurance cover of Rs. 5 lakh per bank for deposits), fixed returns
in the form of interest and is liquid. It is a meaningful choice when planning for short-to-medium financial goals, saving tax (with a 5-year tax-saver FD), as well as keeping money aside for contingency or a rainy day.
However, as you may be aware, the interest earned on a bank FD is subject to change depending on the interest rate cycle. You may find banks periodically revising the interest rate contingent upon whether the Reserve Bank of India (RBI) increases
or decreases its monetary policy repo rate.
Currently, in a world that is surrounded by geopolitical tensions, a lingering COVID-19, outbreak of the monkeypox virus and spiralling inflation, central banks across the world (including the RBI) are raising their policy rates to tame inflation.
With this, the bank FD rates also are once again moving up. If inflation continues to remain sticky -- which is proving to be the case so far -- it is possible that bank FD may earn you an even better interest rate.
If the plan (cumulative or interest payout) and tenure are thoughtfully selected, you could yield a decent return on your bank FD. To know how much returns your investment in a bank FD will earn, use Axis Bank’s FD calculator.
To make the most of your investment in bank FD, do the following:
- Invest now when the interest rates are moving up.
- Choose the cumulative (also known as the reinvestment of interest) plan as far as possible.
- Follow the FD laddering strategy, wherein you spread your lumpsum investment across maturities (paying heed to your liquidity needs), whereby you potentially earn a better return.
- Avoid prematurely encashing the FD, as it would put brakes on the compounding process.
- And at maturity, if you don’t need the money immediately, make it a point to renew the FD for a suitable period to support the power of compounding.
[Also Read: New to investing? Here’s why you should look at bank FDs]
How to find the best interest rate for you?
Don’t just blindly opt for a bank that is offering you an exceptionally high-interest rate. Keep in mind that the higher the rate offered, the higher is the risk involved; you could lose your capital (hard-earned money) and imperil liquidity.
When you are looking for the best interest rate, pay attention to the financial health of the issuer or the issuing bank. This is of prime significance for the safety of your capital. Therefore, carry out thorough research of the financial health
of the bank, assess if the bank has a respectable promoter history, credible management and whether it diligently meets the compliances of the RBI. Avoid taking undue risk for want of higher returns. Stories of some cooperative banks offering
an unusually higher rate of return and then going bust are ample. Learn from the mistakes you and others may have made.
Note that, the interest earned on FDs is taxable (under the head ‘Income from Other Sources’) as per the current income tax law. In the case of non-senior citizens, if the interest income exceeds Rs. 40,000 in a financial year, the
bank first deducts tax at the source. For senior citizens, this threshold limit is Rs. 50,000. The rate of TDS is 10% if PAN is furnished, and if not, then 20%. No surcharge or cess is levied over and above this basic rate.
However, to avoid TDS, you may furnish a declaration under Section 197A of the Income Tax Act in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens), as applicable, to the bank.
Furthermore, you may split your bank fixed deposit investments across financial years, alongside investing in different family members whose income is below the base exemption limit.
A sensible approach to investing in bank FD can result in a rewarding experience. Amidst a time when the market volatility is likely to intensify, and interest rates on deposits are moving up, it makes
perfect sense to invest in bank FD. So, book your bank FD today! And if you wish to invest in a piecemeal manner every month out of your monthly earnings, open a Recurring Deposit account.
Keep in mind that there isn’t a magic number as to how many FDs or RDs one must hold. Depending on the goals you’re addressing, that many FDs or RDs could be held.
Disclaimer: This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
