Fixed deposits in India: An overview
One of the oldest forms of saving and growing wealth, FDs (Fixed Deposit) and their history is tied to the creation of the banking system in India. Banking established its foothold in the country sometime between 1906 and 1911, during the Swadeshi movement. This was the time when prominent businessmen and political leaders founded banks to preserve the public’s money. Many banks that were established then, still exist to this date. These include India Bank and Bank of Baroda, amongst others.
Post-freedom, India experienced a phenomenal growth in the banking sector. The Reserve Bank of India (RBI) and Imperial Bank of India offered extensive banking services. Apart from lending financial support to businesses, their primary motive was to preserve and secure the deposits of money made by the people. This gave birth to term deposits, popularly known as fixed deposits to preserve, protect and enhance the value of a depositor’s savings.
Today, FDs are one of the most widely used investment options in the country. They hold a prominent position in the mind of an Indian investor, primarily because they offer assured gains and aren’t linked to the market. According to SEBI Investors Survey 2015, more than 95% of the Indian population prefers FDs when they think of making an investment. In terms of preferred instruments, fixed deposits trump life insurance, mutual funds or stocks.
The highest FD interest rates in India
During 1995 to 1997, investors enjoyed the highest interest rates on their fixed deposit, which was a hefty 12.3% to 13%. Today, a rate over 7.3% is considered good.
Types of FDs
Fixed deposits are offered by banks and by companies. While bank deposits offer safety, in that a depositor gets a deposit insurance up to Rs.1,00,000, they do not offer high interest earnings. Company FDs are offered by financial institutions and non-banking financial companies and usually come with a higher interest payout. To keep your interest safe, you can choose company FDs with a high safety rating.
2017’s FD interest rate*: A snapshot
- Bank FDs:
- Central Bank:
- Safety rating: CRISIL, FA
- Interest rate: 7.3%
- HDFC LTD:
- Safety rating: CRISIL FAAA ICRA MAAA
- Interest rate: 7.15%–7.40%
- ICICI Bank:
- Safety rating: CARE AAA FD, ICRA MAAA
- Interest rate: 6.75%
- Central Bank:
- Company FDs:
- Bajaj Finance:
- Safety rating: CRISIL FAAA, ICRA MAAA
- Interest rate: 7.35–8.10%
- Dewan Housing Finance:
- Safety rating: CARE AAA FD, BWR FAAA
- Interest rate: 7.35–8%
- PNB Housing Finance:
- Safety rating: CRISIL FAAA/ STABLE
- Interest rate: 7.35–10.42%
- Bajaj Finance:
* These rates depend on the tenor, corpus and plan selected.
What is the Bajaj Finance Fixed Deposit?
The Bajaj Finance Fixed Deposit is a company FD. This means that an investor can deposit a sum of money with Bajaj Finance, an NBFC, for a fixed term. Over this period, the corpus that is invested earns interest. Unlike bank FDs, company FDs are unsecured. This means that they carry some element of risk. But, company fixed deposits are governed by the Companies Act, Section 58A and have stability ratings to help you choose a credible one.
Take a look at how this works in reality.
Assume you are a 32-year-old professional working in a research firm. You want to purchase a new hatchback car. But, you will have to raise money to fund this purchase via an investment. So, you decide to invest Rs.3 lakh in a cumulative fixed deposit with Bajaj Finance.
Assuming that you are getting a rate of interest of 7.8% per annum, and you invest for 3 years, you will be able to build a corpus of Rs.3.76 lakh. Here, Rs.3 lakh is the initial investment and Rs.76,000 is the interest that the amount has accrued. Since it is a cumulative fixed deposit, you can access both these components at the lapse of your tenor.
Here’s a quick look at the benefits that Bajaj Finance Fixed Deposits offer:
- They offer safe and stable growth for your savings.
- They can be liquidated easily in case of an urgent need of finance.
- They offer attractive rates of return, and higher interest for senior citizens.
- They are uninhibited by market forces. So, they provide your money more security.
- They let you choose from cumulative and non-cumulative payouts, depending on your requirements.
- They can be started with a nominal amount. You only need a minimum of Rs.25,000 to start one.
- You can choose a tenor according to your investment plan.
How does the Bajaj Finance FD safeguard your interest?
Even though FDs are one of the safest forms of investment, you want to be absolutely sure that your hard-earned money is in good hands. To do this, you must pick an FD that has been awarded a high security rating. The higher the rating, the more credible the fixed deposit provider is. Broadly speaking, agencies such as CRISIL, ICRA and CARE provide various fixed deposits security ratings. So, you must make a note of this and understand what the rating means before you pick one.
Bajaj Finance’s Fixed Deposits have an FAAA rating awarded by Crisil, and MAA rating by ICRA, which is the highest possible safety rating for repaying interest and principal amount on time to its customers.
What are your options?
Essentially, fixed deposits are of two types: cumulative FDs and non-cumulative FDs. The differentiating factor is the manner in which interest is paid to you. Cumulative FDs involve accumulating the interest of the FD over the tenor and receiving it directly at maturity.
Whereas, non-cumulative FDs let you invest a sum of money and gain periodic returns (monthly, quarterly, semi-annually or annually) from it, mimicking a salary or pension. Each of these types has its own benefits. You can pick an option depending on the end goal of making the investment.
For example, take the case of Mr. Lalwani. He works as a CA in a reputed organisation. He realised that he wanted to raise money to fund an international holiday for his entire family. Making a direct purchase would mean that his finances would take a hit, and Mr. Lalwani wasn’t in favour of this. He also didn’t want to borrow a loan. So, he decided to invest a sum of Rs.4 lakh in a non-cumulative FD, with a good interest rate of 7.85%, for a period of 4 years.
At the end of the tenor, he earned an accumulated interest of Rs.1.4 lakh over and above the invested corpus, thus enabling him to fund a holiday. Consider this: Had Mr. Lalwani invested the same amount for the same duration, at the same rate of interest for a monthly payout, his accumulated interest would have been Rs.1.25 lakh.
As you can see in this example, Mr. Lalwani’s need wasn’t immediate. Hence, cumulative FDs suited his purpose the best. Similarly non-cumulative FDs could come handy for other purposes like for senior citizens who want a periodic payout for lifestyle expenses.
How to choose the right FD
You can choose the most convenient FD based on various factors; for example, by considering interest rates, examining your needs, the payout convenience, liquidity and so on.
Here are some ways to decide on the FD:
- By interest rate: The interest rates for FD will vary from one financial institution to another. But, before you decide on one, make it a point to scan the market thoroughly. This will introduce you to various interest rates, which you can then compare. Accordingly, select a lender that offers you the best rate. Even a minor difference in interest rates will impact your fund’s growth.
For example, if you invest Rs.5 lakh in a fixed deposit with a rate of interest of 7.5% for one year, at the end of the tenor, you will have Rs.5.37 lakh. But, if you invest the same amount in an FD that offers 8.10%, the amount at the end of the tenor will be Rs.5.40 lakh.
- By payout convenience: There could be various formalities to perform when you are getting the interest payment. This could include paperwork, or payment of certain charges. You should select a lender that offers the quickest and fastest payout.
- By liquidity: Not all fixed deposits are liquid. Some lenders have strict policies that levy fines or penalties for withdrawing an FD before its maturity date. If liquidity is a priority for you, refrain from investing with a lender that has your money locked down for the duration of the tenor.
- By examining your needs: Ask yourself why you are investing in an FD. Is it to purchase a vehicle? Is it for retirement? You can then select an FD that matches these requirements.
How to have the figures at your fingertips?
The key to understanding which fixed deposit is best for you is to have all the facts and figures accessible at a glance. A smart way of doing this is to use a fixed deposit calculator. You have to input the investment amount, interest rate, and tenor, and choose between cumulative and non-cumulative payouts. Then, the calculator will tell you how much you will have at the end of the investment period in a matter of seconds.
Take a look at the FD calculator’s many benefits:
- View your returns: Since the calculator has fields or sliders to adjust the tenor, principal and interest rate, it shows you how your investment’s gains will vary when the variables change.
- Choose the right tenor: Since it shows you the returns at various tenors, it enables you to select one that matches your expectations with regards to returns.
- Easy comparison: An FD calculator gives you results in mere seconds, and so, it makes light work of comparing various fixed deposits. With its results, you’ll be able to pick the best fixed deposit easily.
- Easy to use: These calculators have user-friendly interfaces that make them easy to use. You have to just fill in a few details to get an overview of the prospective investment.
- It is accurate: Unlike doing the calculation manually—which is a long and complicated process—using a fixed deposit calculator is much simpler. Since a computer carries out the mathematical calculation, there is also no room for error. You will get accurate results every time. The same can’t be said for when you do the calculations manually.
How to save tax on your Bajaj Finance FD
The returns you earn from a fixed deposit are taxable. However, several investors are unaware of the tax rules that govern this investment. Here’s a look at what you need to know:
- If your total income, including returns from fixed deposits, is lower than the taxable bracket, don’t have to pay any tax on it. As long as you submit form 15G/15H, you can avail this benefit.
- In all other cases, the interest earned will be taxed at the same rate as your income, if it crosses Rs.5,000/Rs.10,000 (depending on the financial institution). This means that it can be taxed up to 30%.
- You can also save tax by filing declaring your returns. Even if you have invested in a cumulative fixed deposit, declare the interest income each year. This is because your lender is probably deducting TDS and depositing it against your PAN. Doing this will avoid inconsistent details in your tax credit statement.
- Opening multiple FDs in various banks or bank branches is not a good way to save tax. This is because the IT Act takes into account your total earnings from fixed deposits in a year. This is an aggregate figure and includes all the FDs in your name.
- It is also believed that you don’t have to pay tax if you invest in the name of your non-working spouse, child or any other family member. But, this is a myth. The interest income will be added to your bracket and will be taxed according to your tax slab.
- If you invest in a tax-saving FD with a lock-in period of 5 years, you get an exemption under section 80C. According to this section, the amount invested is exempted up to Rs.1.5 lakh per year.
Why should senior citizens choose the Bajaj Finance FD?
Senior citizens need to find a way to secure their future financially. To do this, they must make investments that are flexible and at the same time offer decent returns. Their investment instruments must be secure and mustn’t require constant monitoring.
Also, since they don’t have a steady income, senior citizens need an investment that is not linked to market forces, as they don’t have the earning capacity to offset any losses. While many investments don’t cater to these needs, fixed deposits do the job perfectly. In fact, the Bajaj Finance Senior Citizen Fixed Deposit offers a lot of benefits for senior citizens.
Primarily, the Bajaj Finance FD offers senior citizens an interest rate of 8.10%, which is much higher that what other customers get. This means that while other customers benefit from 7.85% interest rate, senior citizens get more value for the same amount of investment.
Besides this, here are the other benefits that it offers:
- High stability and credibility: Stability and safety of income is most important for senior citizens. Bajaj Finance’s FDs feature an MAAA rating by ICRA and an FAAA stable rating by CRISIL. This ensures that your investment is in safe hands.
- Online account management: The online account management service offered by Bajaj Finance lets you manage your fixed deposit easily, from the convenience of your home.
- Doorstep service: It is tiresome for senior citizens to wait in long queues and complete formalities. But, this shouldn’t deter you from investing in FDs. So, when you opt for Bajaj Finance’s FDs, you have the option to call a representative home and complete the application procedure.
Minimal deposit amount: You only need a minimum of Rs.25,000 to start this fixed deposit.
How does your FD become a tool for financing?
You can use your FD to get finance in the form of a loan. You can get a loan of up to 75% of the loan value. The interest rate that you have to pay will be at least 2% higher than what you’re gaining from your fixed deposit.
Take a look at a few of the advantages a loan against a fixed deposit offers:
- It averts the risk of submitting valuable assets as collateral. Hence, you can keep assets like property protected.
- Loans against FD usually come with easier application formalities since you are submitting your FD as collateral. This means that your loan will be approved faster.
- If you have a non-cumulative FD, the monthly returns can be used to pay a small portion of your loan’s EMI, thus lowering the repayment burden.
- Also, these loans have lower interest rates since you are submitting some form of collateral.
How does an FD provide liquidity?
Liquidity is an important aspect of any investment option. Liquid FDs enable you to raise money instantly in cases of emergencies. The Bajaj Finance FD features flexible premature withdrawals. This means that no matter what your emergency, you can use the money from your FD. But, some FDs require you to pay hefty charges when you want to exit your deposit prematurely. Read the fine print to avoid this from costing you.
How much income should you park in your FD, based on your risk capacity?
How much you should invest in fixed deposits will vary from investor to investor as it depends on your risk appetite. While investors with a good risk appetite might consider investing less money in FDs and more in market securities, investors with a low risk appetite will do just the opposite. Here’s a quick run-through.
- If you are a conservative investor: If you like to play it safe and invest heavily in low-risk options, invest less in market related securities like mutual funds or equity and more in an FD.
- If you are a moderate risk investor: If you are a moderate risk investor, you usually like to gain from having a diverse investment portfolio. You try to maintain a 50:50 mix by investing equally in both high-risk and low-risk investments. So, you should consider investing equally in fixed deposits and other instruments.
- If you are an aggressive investor: If you seek large capital gains in a short or medium term and have a big risk appetite, you are an aggressive investor. So, you must focus more on investment options like equity and mutual funds, and add fixed deposits to your portfolio as a secondary option or safety net.