After the big increase in the repo rate by the Reserve Bank of India (RBI) in the last few months, all the major banks of the country have increased the interest rates offered on their fixed deposits (FD) several times to attract new customers. Due to this, investing in FD has once again become beneficial.

Significantly, to reduce inflation, RBI is increasing the repo rate. RBI has increased rates by a total of 190 basis points since May. It is likely to increase further. That is, the increase in rates on FD may continue even further. This is good news for investors. After Corona, banks had reduced the interest rates on FDs significantly. Now it has started increasing.

Subas Tiwari

What is a FD?

A fixed deposit or an FD is an investment instrument that banks and non-banking financial companies (NBFC) offer their customers. Through an FD, people invest a certain sum of money for a fixed period at a predetermined rate of interest in an FD. The rate of interest varies from one financial institution to another, although it is usually higher than the interest offered on savings accounts.

Fixed deposits are available for different periods, ranging from very short-term tenures of 7-14 days to long tenures of 10 years. A fixed deposit is sometimes known as a term deposit.

How does a FD work?

You may think of a fixed deposit as lending money to a bank or an NBFC. When you invest in an FD, the financial institution guarantees to return the invested sum at the end of the tenure, known as the maturity period, and pays you interest for it. The bank may use this money to lend to other borrowers and charges them an interest for the same. A portion of this interest is passed on to you.

The interest offered depends on the tenure or maturity period of the FD. A 7-day fixed deposit will carry a lower annual interest rate compared to a one-year FD. This is to compensate for the time-risk of money. Simply put, a rupee today is more valuable than the same rupee a year from now. This is because inflation pushes up prices over time. A rupee will buy you more goods today than it will a year from now. An investor needs to be compensated for this.

You can choose to reinvest the interest or receive an interest amount periodically in your bank account.

Cumulative FDs pay you the interest and the principal at maturity. The interest is reinvested every year. This means that you will not be eligible to receive regular interest pay outs, instead of receiving a lump sum at the end of the FD tenure. The cumulative FD option may be suitable for you if you do not need a regular stream of income. Under this option, you will also benefit from the power of compounding, as the following year’s interest will be calculated on the principal plus interest of the previous year.

 Non-cumulative FDs will pay you interest at fixed intervals. You could choose to receive interest payments monthly, quarterly, half-yearly, or annually, depending upon your needs. This will give you a regular stream of income. However, the downside of non-cumulative FDs is that you will lose out on earning interest on interest.

Types of Fixed Deposits

Before you invest in a fixed deposit, you must know the different FDs offered in the market.

• Standard Term Deposits

Standard fixed deposits are investment schemes wherein you invest an amount for a fixed period and a predetermined interest rate. The period of investment or tenure can range from 7 days up to 10 years. The interest offered depends on the duration of investment as well as the financial institution offering this instrument.

• Senior Citizen Fixed Deposits

For individuals over 60 years of age, banks and NBFCs offer a higher interest rate on FDs than other investors, usually providing about 25-50 basis points (0.25-0.50%) more. They also provide an additional tax benefit. Interest from senior citizen FDs does not carry a tax deducted at source if it does not exceed ₹50,000 a year. Other investment options do not provide this benefit for seniors.

For individuals who are not senior citizens, the TDS deduction limit is at ₹40,000 a year. Investing in FDs as a senior citizen will reduce your overall tax burden and hence, increase returns.

• Tax-Saving Fixed Deposit

There are specific tax-saving FDs that are eligible for tax deductions. A tax-saving FD has a maturity period of 5 years and the principal amount, up to ₹1, 50,000 per annum is tax-deductible under section 80C of the Indian Income Tax Act.

• Recurring Deposit

A recurring deposit is a type of fixed deposit wherein you can invest a fixed sum monthly or quarterly for a specified time. The interest rate is predetermined. At the end of the maturity period, you will receive your principal along with interest calculated proportionately. For instance, you can deposit ₹1,000 every month for five years. Interest on the first deposit will be paid for five years while that on the last deposit will be paid for one month.

• Flexi Fixed Deposit

A flexible fixed deposit is linked to your savings account. In this instrument, you can instruct your bank to automatically transfer any sum beyond a predetermined balance to a fixed deposit via an auto sweep-in feature. For instance, if you want to maintain a balance of ₹20,000 every month, any excess will be transferred to an FD. Conversely, if your balance falls below ₹20,000, the bank will liquidate a portion of your FD to maintain your balance. It gives you the benefit of liquidity and investment.

The interest on the flexi-deposits is higher than savings account interest rates but lower than standard fixed deposit rates.

• Fixed Deposit for Non-Resident Indians

Non-resident Indian citizens can invest in non-resident external (NRE) or non-resident ordinary (NRO) fixed deposits. NRE FDs are suitable for citizens earning in a foreign currency. Although there are currency fluctuations, the most significant advantage of NRE FDs is that the whole amount, principal and interest, are tax-free. NRO FDs can be deposited in Indian or foreign currency and are taxable at 30% per annum.

• Corporate Fixed Deposits

Some companies or corporate entities also offer fixed deposits. While they offer a higher rate of interest than banks and NBFCs, the risk associated with corporate FDs is higher. While bank and NBFC deposits enjoy backing and insurance coverage from the DICGC, corporate fixed deposits do not provide this insurance. If a company goes bankrupt, there is no guarantee that your money in corporate deposits can be recovered.

Deposit Insurance

All banks which are members of the Deposit Insurance & Credit Guarantee Corporation enjoy protection by way of enjoying insurance coverage against bank winding up and/or liquidation of bank for which the banks need to pay a nominal insurance premium at regular intervals. The bank depositors thereby enjoy DICGC cover up to Rs.5, 00,000 per deposit account in each bank in the event of such unfortunate events taking place at any time.

Taxation on FDs

The interest earned on fixed deposits is taxable. It is charged at your applicable tax slab under the head of “Income from Other Sources”.

However, banks will deduct TDS (tax deducted at source) at the rate of 10% per annum from your interest. That can be accounted for when filing your income tax. When filing your taxes, calculate the interest income you have earned for the year, compute tax by charging tax based on your income tax slab rate and then deduct any TDS amount. This is the net tax payable. TDS on interest income is deductible only if your total interest is above ₹40,000 per annum. For senior citizens, the limit is ₹50,000.

Fixed Deposit Interest Rates in India 2022

Sourced from- ET Money on 15^th Dec 2022