Fixed deposits have traditionally been the preferred investment choice for generations in India. If you have a low appetite for risk and want a high rate of return, fixed deposits are just the right choice for you. Ideal for long term investment goals, fixed deposits can also be availed for periods as short as 7 days. However, there are certain things that you need to be aware of when investing in fixed deposits.

Deposit limits

Fixed deposit limits can vary from public sector to private banks. You need a minimum of Rs. 1,000 to open a fixed deposit account with government-owned banks while banks in the private sector usually have a higher deposit limit. There is no upper limit. If your deposit exceeds the sum of Rs. 1 crore, it is classified as a bulk deposit and you can earn a higher rate of interest.

Interest earned

Depending on the duration, you can earn interest from 3.75% to 7.25% on your fixed deposit. Interest rates can change periodically based on factors like inflation and investor demand. If you’re a senior citizen, you can benefit from a higher rate of interest. Typically, you can earn a premium of 0.25 to 0.75%, if you’re above 60 years of age. Compounded interest is calculated on a quarterly basis.

Maturity

On maturity, you can opt to reinvest both the principal amount and accrued interest for another term, reinvest just the principal or withdraw the lump sum in its entirety. Remember to indicate how you would like the fixed deposit amount to be handled on maturity, while applying for it. Not doing so will lead to the amount being reinvested automatically.

Penalty

If you decide to terminate your fixed deposit before maturity, you may have to pay a penalty. While the exact percentage of penalty may vary from bank to bank, you may be liable to pay anywhere between 0.5% to 1% as penalty. There are exceptions, though. At the discretion of the bank, the penalty may be waived if you choose to reinvest it with the same bank.

Liquidity

Depending on the terms and conditions of your fixed deposit account, partial withdrawals may or may not be allowed. Partial withdrawals on tax-saver fixed deposit accounts, for example, are prohibited. For regular fixed deposits, partial withdrawals may be allowed. However, interest rates on the residual amount may be revised by the bank.

It is important to note that the interest earned on your fixed deposit is subjected to taxation. It’s added to your income and taxed as per the existing income tax slab. Also, in case you want your bank not to deduct TDS on your deposit, you need to submit Form 15 G/15 H (for senior citizens) on the first week of April.

Learn more about Mutual Funds for a good personal financial management.


DISCLAIMER

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.



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