How to Make the Most of a Fixed Deposit Account?

Youngsters are finding mutual funds and stock market investments to be attractive lately, and they are getting ready for high risks instead of high returns. In the quest for higher returns, individuals these days forget the importance of the basics—saving. Also, many risk-averse investors looking for capital security over higher and unguaranteed returns.

Fixed deposits are one way to save and a tool that provides capital security, guaranteed and fixed returns, flexible amount and tenure, and other factors. In addition, this can bring balance to your investment portfolio. This article will tell you the factors you need to consider when investing in an FD account and the factors you need to follow to get the maximum benefits.

Factors to Consider Before Investing an FD

It seems like a fixed deposit account is a fundamental investment tool, and there’s nothing much to know about it. Diving deeper into this, you will find out many things that nobody ever talks about. Here are a few such factors that are good to know if FD is on your mind.

  • Modes of Operation
    You can open an FD account either online or offline. Further, you can operate or transact with the account both online and offline. The pandemic makes it safer to check account details online.
  • Correlation between Interest Rate, Tenure, and Amount
    The interest rate applicable to your FD account depends basically on the deposit amount. Note that the interest rates applicable to a deposit of up to Rs.2 crore are different from those applicable to a deposit above Rs.2 crore. Similarly, the rates applicable to a longer tenure can be higher.
  • Penalties
    If you want to withdraw the FD account balance well before the maturity date, the same will attract a certain penalty. Also, not all FD accounts allow premature withdrawal. Even in partial withdrawal, there may be a certain penalty applicable, or the remaining balance may not attract the contracted interest rate.
  • Income Tax
    As per the Income Tax Act, any interest earned on bank deposits is considered as income and is taxable. The tax rate applied depends on the income tax slab you fall under. If your interest income is within Rs.40,000 for regular customers and Rs.50,000 for senior citizens, TDS will not be applied. If your total annual income is within the basic exemption limit, submit Form 15G/15H to request the bank not to deduct tax at source on interest income.
    On the other hand, the deposited amount can get an income tax deduction given that the FD account is a tax saving FD account. You can get a deduction of up to Rs.1.5 lakh on deposits under Section 80C of the Income Tax Act.
  • Interest Rate
    Different banks and financial institutions may offer FD schemes at different rates. The interest rate applicable to an account will be fixed when opening the account, and the same rate applies until maturity. Senior citizens and bank staff may get an additional 0.5% interest over and above regular customers.
  • Deposit Tenure
    The minimum tenure for an FD account is seven days. Any account for a tenure less than seven days will not earn any interest. The maximum tenure can be 10-20 years based on the bank’s discretion. 

How to Maximise Benefits

It is always good to research and understand how to make the most of anything and everything you want to do. This is especially true when it comes to investing and financial products. Just understand the following factors to be content the next time you open an FD account.

  • The right bank
    The first step to get maximum returns from an FD account is to shop for the right bank that offers high returns. Choose the bank or financial institution that offers the best rates despite the falling interest rates due to the economic activities in the country.
  • Multiple FD accounts
    Instead of depositing all your surplus funds in a single FD account, you can deposit them in multiple FD accounts. That is, different banks may be providing higher rates at different timeframes. Keep looking for such offers and deposit your money in multiple avenues so you can earn higher interest rates on each of the FD accounts.
    Following this strategy, you can gain from varying interest rates, safeguard your funds, take advantage of various maturity periods, and so on.
  • Cumulative FD account
    A cumulative FD refers to an FD account where the interest earned is not paid out periodically. Instead, the interest gets accrued in the account and benefits from the concept of compounding. This set-up facilitates you to earn interest on the principal + interest earned in the previous month.
  • Interest Re-investment
    Upon maturity, you are advised to renew the account such that the principal and the interest earned in the previous cycle be reinvested. This will allow you to get a higher corpus. If you choose an auto-renewal facility, make sure to choose the option for reinvesting principal and interest.

Since you know how to make careful considerations on FDs and how to make the most of an FD account, make sure to use these learnings when possible. 

For any clarifications/feedback on the topic, please contact the writer at apoorva.n@cleartax.in

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