Fixed deposits are the most popular kind of deposits in India. Did you know that in 2017-18, out of all the deposits in Indian banks, 57.7% were FD? This was revealed in data released by the Reserve Bank of India. If you to are thinking of investing in such accounts to secure your financial future, then it could be a great idea. Here’s why.
1. Guaranteed Returns
One of the biggest advantages of these deposits is that they are extremely safe. Since they are not dependent on the market fluctuations, they offer guaranteed returns. And after the Union Budget 2020, there is an insurance of ₹5 lakhs for fixed deposits in all commercial and cooperative banks. The deposits are insured by the Deposit Insurance and Credit Guarantee Cooperation (DICGC). This makes fixed deposits even more secure.
And talking about returns, the rate of interest offered is great as well. FDs can offer interest rates of up to 7%, which is higher than the inflation rate. Senior citizens generally get an even higher rate.
2. Offers Tax Saving Benefits
If your earnings from these deposits are below ₹40,000 during a single financial year, then you would not have to pay any TDS. For senior citizens, they do not have to pay TDS for earnings of up to ₹50,000 per year. But, to get this benefit, you would have to submit Form 15G, and senior citizens would need to submit Form 15H.
3. Easy Withdrawal
There are times when you might be in urgent need of cash and Fixed deposits can be extremely beneficial in such cases. Unlike some of the other types of investments, you can cash out your FD, even if the tenure isn’t over. All you need to do is pay a small penalty. This fee can vary from bank to bank, but is generally around 0.55% to 1% of the deposit amount. This can serve as a financial cushion in case of accidents or illnesses.
These investments offer great flexibility when it comes to tenure too. You can choose tenures from as less as 1 year right up to 10 years. It is advisable to invest in deposits of different tenures. For instance, you can open three accounts, one with a tenure of 1 year, another for 3 years, and the last for 5 years. When the 1-year deposit matures, you can renew it for 5 years. This allows you to get regular interest payments.
There are plenty of options when it comes to payouts as well. You can choose from monthly, quarterly, half-yearly or yearly interest payments.
5. Power of Compounding
With fixed deposits, you can leverage the power of compounding. This means that instead of taking your interest out, you can reinvest it in the FD. This means that not only do you earn interest on the deposit, but also on the interest earned. This allows you to grow your savings exponentially. You can use an FD interest rates calculator to know the increase in earnings when you reinvest.
Apart from these, FDs also help develop a habit of saving. And they are extremely easy to open as well.