All your questions about investing in Fixed Deposits answered
Professor Bakshi was having a good time educating Class XI students. He was telling them about the importance of savings. The session got more interesting when a student raised a question. The boy asked him if a Fixed Deposit (FD) was a savings tool too. Many interesting questions followed this query. Professor Bakshi answered them all one by one.
Here Are Some of the Questions That the Students Raised:
Q. How is an FD different from a savings account?
A. Fixed Deposit differs from a savings account in various aspects. The former requires you to deposit a fixed a sum of money for a fixed tenure. But there is no such compulsion for the latter. Also, FDs earn a higher interest than savings accounts. You can withdraw money from a savings account. This is subject to certain conditions. But you cannot withdraw money from your FD until the expiry of the tenure. If you do make a withdrawal, you may have to pay a penalty.
Q. Where can I open an FD? What are the documents needed?
A. You can open an FD with banks, NBFCs, and companies. For this, you can visit their branches and fill a physical form. You can also fill an online form. These are available on their websites. You need to submit some documents while applying for an FD. These include proofs of your identity, address, and signature. You also need to provide a recent photograph of yourself.
Q. What is the average FD interest rate? Do I get a different rate of interest if I deposit a high amount?
A. The interest rates on FDs vary from lender to lender. The current interest rate ranges from 3.50% to 8.25% per annum. The rate depends on the tenure of your loan. The longer the tenure, the higher the interest rate will be. What if you open an account with a high amount? Deposits of more than Rs.5 crore may earn a higher interest rate.
Q. Is the rate of interest uniform across all categories of applicants?
A. The rate of interest on FDs is the same for all the categories except two. Senior citizens get a slightly higher rate of interest. But this is subject to certain conditions. Also, employees of lenders like Bajaj Finserv also get higher rates. Prior customers too can get higher rates. However, this may vary from lender to lender.
Q. What is the tenure of the FD? Can I withdraw money before the expiry date?
A. Different lenders offer multiple ranges of tenure. It varies from seven days to 20 years. You cannot withdraw money from your FD before the end of the tenure. You could do this only if there is an emergency. Any premature withdrawal attracts a penalty. Such a penalty usually ranges from 0.5% to 1% per annum. In such cases, you get a lower interest.
Q. What benefits will I get by opening an FD?
A. FDs encourage savings since the money stays invested for a fixed period. Compared to savings accounts, you get a higher rate of interest on FDs. You also get guaranteed returns on these. This is because the returns are not market-driven. If you open an FD for a period of five years, you get tax benefits. The amount that you invest in such FDs can be deducted from your taxable income. The deduction can be up to Rs.1.5 lakh.
Q. When will I get my interest?
A. There are two types of interest payout options: cumulative and non-cumulative. Under the former, you get interest every month, quarter, six months, or year. The latter scheme pays interest at the end of your tenure, along with the principal amount. The compounding of interest in this case happens once a year. Compounding is when you earn interest money on your past interest payouts. Confused about compounding? Then read this:
By the end of this session, Professor Bakshi had cleared many of the students’ doubts. Before leaving, he reiterated that FDs are saving instruments. Some of these FDs offer tax benefits. They also give you guaranteed returns. The loan tenure and rate of interest varies.