Fixed Deposit

A Fixed Deposit is a type of product offered through banks, when a depositor puts money in a fixed deposit, the amount of profit received by the depositor and interest paid by the bank on investment is fixed. The rate will not change regardless of the fluctuation in interest rate.

If the investor wants to withdraw money before maturity, then he will have to pay a fee as the withdrawal penalty.

Let's say ram got retired in October 2022 and he received 20,000 as commuted pension (Lumpsum pension not like a pension received every month). 

To gain more benefit from fixed deposit he invested 15,00,000 as a fixed deposit for 5 years at a prefixed interest rate of 8% then he would get 15,00,000 (invested amount) + 8% *5* 15,00,000= 15,00,000+ 6,00,000 =21,00,000

But due to urgent requirement he needs 10 lakhs at the completion of 3rd year, and at that time if he wants to withdraw the amount prematurely then he will not get a sum of the fixed amount (15,00,000) + interest on 3 years (8 *3* 15,00,000) but he will get this amount after deducting premature withdrawal penalty.

The attractiveness of fixed deposits is due to the following reasons.

1.      Higher interest rate

Putting our hard-earned savings into an FD can give us a higher interest rate than keeping them in a regular savings account.

2.      Flexible tenure

  The decision of tenure is whether the bank account holder wants to fix their deposit for 7 days (minimum) or 10 years (maximum) or in between them.

3.      Tax benefits

 A tax-saver FD with a lock-in period of 5 years can help you avail of tax benefits (under section 80 c of the income tax act 1961, we can claim up to Rs 1.5 lakh against our FD).

4.      Loan against FD

In case of any emergency, we don’t have to break our FD prematurely(before the maturity date) instead we can leverage our fixed deposit, apply for a loan and continue earning interest on the deposit amount

There is also some disadvantages and risk attached to fixed deposit.

1.      Low returns.

  While FDs are guaranteed, they are also low as compared to other short-term market-linked investments.

2.      Liquidity

  Withdrawing FD before maturity leads to a penalty charge, sometimes due to urgent need (marriage of son/daughter, accident, etc) we can’t wait for approval of loan on our fixed deposit so we have to incur a loss of penalty charge on premature withdrawal of FD.

3.      Tax returns.

  Interest earned through FD falls under the taxable slab of your income if your interest earned is higher than Rs 10,000.

Written by - Ravi Kumar Rajak | LinkedIn