Fundamentals of Fixed

Deposits
By Narendra Pratap

 As an Indian investor youre bound to have a certain

amount of money invested in a bank fixed deposit. Financial
wisdom apart, it is practically a tradition to do so in India.
While the growth of alternative channels like the equity and
bond markets have turned investment preferences over the
last couple of decades, it is still useful to keep a tab on
this age-old product.

Deposit Period

They can be held for short, medium or long-terms i.e. for

as low as a couple of weeks to as long as a decade.

Security

They are safe, low-risk investments (which is probably why

grandma loves em). Its also why their returns are lower
than riskier products like shares. They are protected by the
DICGC (Deposit Insurance and Credit Guarantee Corporation)
cause everyone needs a hero in case the bank defaults on
payments.

 Heres the kicker! - Returns are guaranteed.

Interest rates are fixed for the entire term of the deposit
and can either be paid-out regularly or reinvested.

Returns/Intere
st Rates

Compounded interest provides more returns (duh! - ideal for

investors). Encasing returns provides a regular income stream
(ideal for grandma - her pension just doesnt cut it at the
flower show).
Public banks usually offer higher rates than private banks
since rates vary according to a banks liquidity needs and
market conditions and its no secret that public banks are
always strapped for cash.

 This isnt the right place to stow funds if its for the
missus birthday.

Liquidity

Money is locked-in for a fixed term thus restricting liquidity

and should only be a preferred investment channel for
surplus funds.

 Yes, theres no escaping it. Tax is deducted at source (TDS)

for interest earned above Rs.10,000 @ 10%.
Taxes are never that simple.
TDS is deducted @10% but taxability depends on the the
depositors relevant tax bracket.

Tax

So, if the interest earned on a deposit in one year is

Rs.30,000, the TDS = Rs.3,000. But if the depositors total
income puts him in the 30% tax bracket, the total tax
payable is actually Rs.9,000. The difference i.e. Rs.9,000 Rs.3,000 = Rs.6,000 will have to be declared and paid
when filing returns.
Tax-saving FDs are exempt from tax provided the minimum
period of holding is 5 years. (You have to fight that itch to
make a withdrawal during this period).

 The deposit can be renewed by giving instructions to the

bank to do so. A new tenor can be chosen at the latest
interest rates.

Renewal

For the lazy investor, who doesnt provide instructions, the

deposit is automatically renewed a.k.a. auto renewals.
The new deposit will be for the same period as the one
that is maturing. The interest rate applicable will be as per
the rates in effect on renewal. (This isnt good news if the
new rate is lower than the old one).

 Thats a no-go!
If allowed, a penalty is charged, usually between 1% - 2%.
This reduces the interest earned.

Withdrawal

Or hold out and on maturity, the entire proceeds accrued

can be withdrawn In cash for amounts up to Rs.20,000

By cheque or transfer to savings account for amounts above

Rs.20,000

Nomination

Up to 2 nominees can be named at any time during the

period of holding. Nominees receive the funds upon death
of the depositor.
In case of joint accounts, an either or survivor instruction
should be given.

Capacity /
Holders

Sharing is caring! - FD accounts can be held individually or

jointly.

 Cant wait to break open the piggy bank?

Sweep-in/Flexi
Deposits

Holders can withdraw the amount of interest earned on the

deposit through an ATM transaction or direct fund transfer.
The balance becomes, in effect, a new deposit.

NonResidents

NRIs can hold fixed deposits in India through NRO/NRE

accounts (everyone can play). Interest rates usually differ
from domestic FD rates, though. It may or may not be
worth the effort depending on the exchange rate.
NRO accounts - for funds held in Indian rupees (INR); NRE
accounts - for funds held in foreign currencies.

 An easy, quick and convenient way to open, maintain and

track fixed deposit holdings.

Online
Application

FDs can be applied for online either through the banks

website or through financial services portals like BankBazaar
Fixed Diposit Section(http://www.bankbazaar.com/fixeddeposit.html).
Allocating funds to fixed deposits isnt a bad idea given all
the great features it has. How much, though, depends on an
individuals liquidity needs and risk-appetite. Timing is also
important. Getting locked-in at a low rate only to find out
that returns have gone up subsequently can be a total
downer.