Get the most out of fixed deposits

High volatility in stock markets combined with the easing inflation has again made fixed deposits an attractive avenue for investors, particularly those seeking assured returns. For, FD schemes of banks not only give assured returns but risk-free returns as well, and all one has to do is park one’s money in such a scheme and forget about it till maturity.

The best part of FD schemes are that they are one of the safe investment avenues and there is very little chance of losing you money as banks are closely regulated and monitored by the Reserve Bank of India. In the current turbulent times, investors are increasingly banking on such age-old investment tools.

Another advantage of FD schemes are that they can get you loans of up to 75-90% of the amount deposited with the bank.

Here are some tips to get the most out of FD schemes:

Do your research well

Take a look at the interest rates offered by different banks before going in for a scheme. You also need to decide the tenure of your deposit. The interest rates offered by different banks could vary. Also, the interest rates for different tenures are different.

Interests offered by banks are either calculated quarterly, half-yearly, yearly or at maturity. So, calculate which bank is going to get you the highest interest.

Suppose there are two banks -- 'A' & 'B'. Bank 'A' gives an interest rate of 10% p.a on a fixed deposit of five years and the interest is calculated on a quarterly basis.

Bank 'B' gives the same interest rate for the same period, but the interest is calculated on a yearly basis. In this case, Bank 'A' will get you more interest than Bank 'B'. The more frequently interests are calculated, the more interest you will get.

Split your FD investments

TDS (tax deductable as source) at 10% is applicable on fixed deposits if the interest earned exceeds Rs 10,000 in a financial year. The tax liability of TDS is determined at the branch level.

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.

You could get the money by breaking either one or two FD accounts while the remaining accounts would continue to earn you the predetermined interest.

Re-investing the interest earned

You have the option of either withdrawing the interest earned or reinvesting the same. If you opt for the withdrawal option, the interest earned will be credited to the savings account specified by you on a regular basis.

The interest you earn every year will be higher compared to the previous year if you keep reinvesting the interest. On the other hand, if you withdraw the interest, you will earn the same interest every year until maturity.

Let’s assume that you are planning to invest Rs 50,000 in a FD scheme for 5 years at the rate of 9.5% p.a. and the interest is calculated on a quarterly basis. If you reinvest the interest, your total interest earned will amount to Rs 29,955.49 in 5 years.

If you withdraw the interest, your total interest earned will amount to Rs 24,609.55. That is a difference of Rs 5,345.94. The greater the fixed deposit, the greater the difference will be.

Tax-saver FDs for better returns

Tax saver fixed deposits give you dual benefits. Apart from giving you an assured return, they are also eligible for exemption under Section 80C of the Income Tax Act 1961. However, TDS is applicable.

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.

Source:Economictimes.com