CA Kunal Singhal

Introduction

Although a very familiar term in everyday life, fixed deposits or “FD” as we call it, is one of the very crucial investments which almost every individual happen to make or open with their bankers.

Definition

Fixed deposits are high interest yielding term deposits offered by bank in India. It is a type of financial instrument which generally offers higher rate of interest than a usual savings bank accounts. FD’s may or may not require opening a separate bank account with the bank. One can place an FD in his usual savings bank account.

It may be interesting to know that, being considered to be one of the safest investments options, FD’s come with an insurance cover from Deposit Insurance and Credit Guarantee Corporation (DICGC) which is a government agency regulated by RBI. This means in case of a bank failure, DICGC protects bank deposits that are payable in India upto a limit of Rs. 1 lac per depositor per bank and refunds to customers. This feature also makes them safer even than post office deposit schemes.

Fixed deposits are liquid assets as they can be realized very easily when in need of money. Some banks even offer additional facilities to their account holders such as loans/ credit cards against the FD’s placed with banks. This feature is very lucrative in real sense, as individual gets to retain his investments which shall mature at a specified date with interest and simultaneously his need for funds is also satisfied in form of loan against FD which he can repay during the tenure of the fixed deposit.

The tenure of FD can vary from 7, 15 or 45 days to 1.5 years and can be as high as 10 years. The longest permissible term for an FD is 10 years. Interest rates offered on fixed deposits differ from bank to bank and is a factor of tenure for which deposit has been placed. Longer the tenure of the deposit higher is the interest rate offered by the bank and vice-a-versa. For example, State Bank of India offers an interest rate of 8.75% on fixed deposits with 1-3 years maturity whereas ICICI bank interest rate ranges from 8.00% – 8.75% on deposits with 1-3 years maturity.

If we calculate an FD can double the amount of investment in approximately 8.5 years from the maturity date. For eg: An FD is placed on 1st-Jan-2015 at interest rate of 8% for a tenure of 9 years. The amount receivable on maturity of the term shall be calculated as follows:

FD amount: Rs. 1 Lac

Interest rate: 8.5% per annum compounded annually

Tenure: 9 years

Amount receivable on maturity: Rs. 2,08,386 (100000*108.50%^9)

Benefits

Tax benefits

As a common practice it is understood that investments made in fixed deposits for a tenure exceeding 5 years qualify for deduction from taxable income under income tax. It helps in lowering the tax burden of the assessee to the tune of Rs. 15,000 (considering that maximum amount eligible for deduction is 1.5 lacs).

Now consider below how you can earn higher rate of interest on FD than offered by most banks:

If you invest Rs. 150,000 in fixed deposits for 5 years

Principal amount: Rs. 150,000

Interest rate offered by bank: 8.50% per annum

Amount receivable on maturity: Rs. 225,549

Tax saving: Rs. 15,000

Total savings: Rs. 240,549 (Rs. 15,000 + Rs. 225,549)

Effective interest rate comes to 10% approx.

This way you can double your money in only 7.3 years approximately as against 9 years as shown above.

Good savings!!

Retirement planning

For the reasons mentioned above fixed deposits surely qualify as one of the safest options to invest for retirement. You can building your corpus over a period of time till retirement. To understand this lets again take an example:

Current age of assessee: 30 years

Retirement age: 65 years

Current salary: 30,000 per month

FD placed in first year: Rs. 1 lac

Tenure: 10 years (maximum permitted)

Interest rate: 8.50% per annum

Amount receivable on maturity: Rs. 226,098

Re-Invest this amount in 10th year for 10 years

Amount receivable in 20th year: Rs. 511,204

Re-invest this amount in 20th year for 10 years

Amount receivable in 30th year: Rs. 11,55,824

So, the amount of Rs. 1 lac invested in 1st year (at the age of 30) becomes Rs. 11.5 lacs by the time you attain age of 60 years. Now imagine what you can achieve if you place FD’s every year for tax benefits. This is called power of compounding which converts a simple FD into a financial planning tool.

Other similar benefits of fixed deposits for which you can consider placing deposits:

  • Planning for childs future/higher studies
  • Planning for childs marriage etc.

Some common types of fixed deposits

Fixed deposits can be categorized as under:

1. Simple FD – These are standard deposits with wide range of tenures ranging from 7 days to 10 years. Interest rate depends on the bank and may vary.

2. Special FD – These are special tenure FD’s where investors can apply for deposits for special periods like 190, 290 or 390 days as offered by banks.

3. Tax saving FD – These are placed to gain benefit under section 80C of income tax. Point to note here is that interest earned on FD’s is fully taxable.

Hope you find this article relevant.

For any specific query please drop a mail to info@caksc.in

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0 responses to “All about Fixed Deposits (FD’s)”

  1. HARSHIDA says:

    Whether stamp paper is required for Overdraft against banks own deposit?

  2. Ritesh says:

    M interested on knowing the procedure of making deposits for small term of 7 days. & to earn interest on the deposit. Also let me know minimum what amount can deposit.

  3. A. Ranganathan says:

    Some points I have to make:
    Longer duration always means higher interest rate is a myth. The rat is determined by demand and supply forces. Presently shorter duration gets more interest income than longer ones.

    Presently Banks deduct Income Tax on the income earned, even on accruals.
    The maturity values quoted are not realistic.

    True on a thirty year deposit as outlined one may get a huge maturity value. What about the erosion in value/purchasing power? It is always on a downward curve.

  4. Ramesh Kr. Solanki says:

    I think Mr. G.M Bharti is right. Really it is not possible.

  5. GANDHI MOHAN BHARATI says:

    I do not agree in part. The interest received / receivable every year is taxable as income to the rate applicable in receiver’s hand. As such doubling the amount in 7.3 years is not possible, particularly if you are in 30% bracket.

  6. Harshan V V says:

    Thanks. Got some information & tax benefit from FD

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