Thursday, May 21, 2009


For people looking to invest their hard earned in money in safe investment options, Fixed deposits with banks comes on top of their priority list. This is because of the fact that bank FDs are absolutely safe and secure investments. The chances of banks defaulting on fixed deposit payments are almost nil since the banks are heavily regulated by RBI which ensures that the bank is in sound financial position. Fixed deposits become more popular in times of instability in equity markets. Fixed deposits are also a favourite with senior citizens. Considering that FDs are one of the most widely used investment options by millions of people, we need to know the various ways in which we can get the maximum benefit out of FDs.I am listing down the following "5 Points to Ponder" before you put your money in a fixed deposit.
1. Rate of interest- The first and the most obvious thing to look at while deciding on your fixed deposit is the rate of interest being offered by various banks. The rate of interest can vary a great deal between banks for similar tenure of fixed deposit and hence it makes sense to find out the bank which gives you the best deal. However, you must also consider the safety and stability of the bank itself . Generally , the co-operative banks offer higher rate of interest as compared to other bigger banks like SBI, ICICI etc. But since co-operative banks are not as solvent and stable as some of the other banks, you will do well to stay away from them. You must compare rates offered by similar banks. For example, you may consider the rates offered by SBI, ICICI, PNB, HDFC, AXIS,CITIBANK,HSBC etc. This is just an indicative list. The idea is to stick to larger banks.
2.Frequency of compounding of interest rate - The second point to consider while choosing the bank for your FD is the frequency with which the bank compounds the interest. Banks generally compound interest earned quarterly, half yearly or yearly. The best frequency is quarterly as it results in higher effective rate of interest for you. For example, If both bank A and Bank B offer to take FD for a year at 10% pa. and offer compounding of interest at quarterly and yearly basis respectively, then the effective rate of interest that you will get on your FD with bank A (quarterly compounding )will be higher than the effective rate of interest on your FD with Bank B.

3. Tax Benefit - If you are looking to invest your money in safe and secure manner while also saving tax under Sec 80 C on Income Tax Act, then tax saving FDs are just right for you.In that case , choose only those FDs which offer tax benefits under Sec 80 C. All FDs do not qualify for tax break under Sec 80C. Also you must consider the rate of interest offered by various banks on their tax saving FDs and settle for the one giving you the best deal.These fixed deposits have a lock-in period of five years and premature withdrawal is not allowed. You can’t use this deposit as a means to secure loan from the bank and the maximum amount you can invest in this instrument is Rs 1 lakh. HDFC Bank at present offers 9.50% interest (calculated quarterly) on tax-saving FDs as well as on regular FDs for 5 years. ICICI Bank, on the other hand, gives 8.5% interest (calculated quarterly) on tax-saving FDs and 9.5% (calculated quarterly) interest on regular FDs for 5 years.
If you fall in the higher tax-slab, investing in tax-saver FDs will fetch you more return than a regular FD as tax-saving FDs are exempted under Section 80C.

4.Interest reinvested or paid - Almost all FDs offer the option of either having the interest amount reinvested in your FD or have the interest amount cashed out. The option that you need to choose will depend on your needs. For example, if you are a retiree or a senior citizen who requires liquidity at regular intervals, then you might consider opting to cash out your interest payment. However, if you are still young and in accumulation stage, then you must have your interest component reinvested . this will ensure higher effective rate of interest for you at the end of the tenure and your interest component too earns interest on it.

5. Splitting the FD -TDS (tax deductible as source) at 10% is applicable on fixed deposits in India , if the interest earned exceeds Rs 10,000 in a financial year. To avoid TDS, you can split your fixed deposits, that is, open fixed deposits in different branches of the bank, so that the interest earned does not exceed Rs 10,000 in a particular branch. You could also open fixed deposits in different banks to avoid TDS. Splitting you fixed deposits has another benefit as well. If you are in need of urgent cash and need to withdraw money, you won't have to break all your fixed deposits.

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