Monday, 22 October 2012

Fixed Deposit

Fixed deposit (FD) is a financial instrument provided by Indian banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date (based on tenure). 

Customer can open Fixed Deposit in bank and gets Fixed Deposit Certificate which is also treated as Fixed Deposit Receipt (FDR) that has to be surrendered to the bank at the time of renewal or encashment.

Period: Tenure of FD is varying from 7 days to 10 years; it depends on bank to bank. Because of this flexibility its powerful financial instruments for investor / individual.


Interest Rate: FD returns depends on Interest Rate; it’s also varying from time to time. Its highly depends on market condition like inflation, liquidity of money in market etc. 

Interest rate of FDs is directly related to RBI monetary policy (Repo Rate – Repo rate is interest rate at which RBI lends money to bank). Under certain conditions like high inflation RBI increase the Repo Rate so Bank will increase their both rates (lending and deposit rates) accordingly.
Co-opeartive banks provide little bit high interest on FD as compare to Nationalized banks.

Safety: FDs are safe up to 1 Lac per customer across all branches of the Bank*. It’s the safest financial instrument in the market. It’s insured by DICGC (Deposit Insurance and Credit Guarantee Corporation). If someone planning to invest more than 1 Lac in FD then invests in different banks (each bank up to 1 Lac), so their money will be secured.
 

Liquidity: Money invested in FD is liquidated easily by paying premature penalty to bank or some bank offers loan on FD which has 1 or 2% higher interest rate than FD interest rate. Its good to pay to premature penalty and withdraw all money from FD. Money will be credited to saving account within 7 working days or less, it’s based on bank policy.
 

Tax exemption: Money invested in Tax Saver FD is exempted from Income Tax under Income Tax Act Section 80C up to 1 Lac if tenure is 5 years. Every bank has Tax Saving / Saver FD scheme. Individual can take this tax exemption for only one year in which money invested not for all five years. 
But Interest of this FD is also taxable. Please see below section [Tax on Return (Interest)] for more detail.

Tax on Return (Interest): Interest earned by FD is taxable. If interest paid to particular customer is more than Rs. 10,000/- per financial year at any branch then bank will deduct Income Tax on interest @10.3%. This is called Tax deducted at source (because interest is treated as income on investment). Bank also issue Form 16A to such customers as a receipt of tax deducted at source.
If individual’s total income (per financial year) does not exceed basic tax exemption limit then they can submit declaration form (Form 15G - in case of individual’s age is below 65 years OR Form 15H - in case of individual’s age is above 65 years) to bank and save this income tax on interest.

Below are the few list of categorized banks: Click on the bank to find interest rate offered by bank for FD.
* - Credit Society or Co-operative society are not considered as Bank. Bank means Nationalized, Co-Operative Bank, Private Bank, Scheduled Bank etc.

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