Bank Fixed Deposits have been the best option for our parents and their ancestors when it comes to retirement or savings for the future. Over time, there have been various modifications in fixed deposit (FD) as an investment option, in terms of accessibility to the customers.
Here is a detailed analysis of the benefits and downside of investing your hard-earned money in FD. And other options that one can consider other than a bank FD.
Benefits of fixed deposits
While the interest may not be higher when compared to equity mutual funds or investment in the stock market, bank FDs give comfort in terms of low risk compared to other market-linked investment options and guarantee capital returns at maturity. Here are a few benefits of fixed deposits.
Interest Payouts: Interest payouts can be fixed on a monthly, quarterly or annual basis based on the needs of the consumer. Alternatively, it can be renewed at maturity along with the principal amount to be continued as FD.
Tax saving FD: There are tax-saving fixed deposits as well that are eligible under section 80C of the income tax act, It is one of the many investment options under 80C that collectively offer an option for income deduction of Rs 1.5 lakh. Tax saving FDs have a lock-in period of 5 years.
Deposit Insurance: As per the latest amendment in DICGC Act, an account holder can access up to Rs 5 lakh maximum as insurance within 90 days of a bank (excluding NBFCs) if it has been put under moratorium due to unusual closure of business.
Tax benefit for senior citizens: Fixed Deposit interest earned by a senior citizen has an exemption limit up to Rs 50,000 on income earned. Interest rates are also higher for deposits for senior citizens.
Loan against bank FD: One can avail loan against the FD and almost all the banks offer this service. The loan amount is based on the deposit value and tenure of the FD. However, do check with your bank about the rules around this facility. Interest on such a loan can be as high as 10% as well.
Disadvantages of fixed deposit
Though fixed deposits are less volatile and come at minimum risks, it is not considered as a top investment option as it has a few downsides.
Fails to counter inflation risk: Interest rates of FDs remain fixed for the tenure of the deposit. They are not dynamic in nature. So, if your FD gives you 5% interest but the inflation rate in the economy is 6%, you are probably receiving negative interest on your investment in the FD.
Penalty on premature closure: If you want to withdraw money before the tenure ends, you may be charged for pre-closure as a penalty and the interest earned so far may also be deducted before crediting the principal amount.
Taxable: In the case of customers aged below 60 years (other than senior citizens), the interest earned on FDs attract TDS (tax deducted at source) of 10% if the interest earned is beyond Rs 40,000, though such amount is adjusted from the filing of returns.
Fixed-rate of interest: Generally the interest rate on fixed deposits is fixed till the tenure of a particular fixed deposit. Hence, they can not enjoy the benefit of higher interest if there is an increase in interest rates in the market.
Low rate of return: The returns in an FD are guaranteed but the FD rates are low as compared to other market-linked investments. The interests earned in FD are taxable and if they cross over Rs. 40,000, it will be deducted at 7.5 % interest rate. For senior citizens, this margin has been increased to Rs. 50,000.
Is fixed deposit a good investment in India?
Fixed deposits have been popular predominantly for their guaranteed return of capital and easy liquidation. However, they are just low-risk investment options and not completely free of risks. As mentioned above, they do not help depositors counter higher inflation rates.
The risk appetite of an individual. If he or she is highly conservative and interested in safeguarding the capital invested, then bank FDs are among such options.
Other investments can be considered
- Company FDs
- Bonds
- Mutual Funds
Most of the drawbacks in an FD can be eliminated if you invest in above said diversifications. Also you can avail additional interest rate benefit with many Company FD/Bonds. A proper estimate of when and how much to invest would definitely make your future plans more profitable.
Note:
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- Info contributed by Gopala Krishnan
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