Fixed Deposits in India

Indian Investors are more conservative when it comes to investment, investors look for guaranteed returns with minimum risk. This approach makes them feel comfortable in terms of risk and returns. Fixed deposit is one such avenue where the risk and returns matrix matches for conservative investors.

The word itself defines the meaning, parking the money in a bank or corporate for a fixed period of time to get predetermined rate of return. Almost all public sector, private sector and commercial banks offer fixed deposit facility. Apart from Banks, Non-Banking Financial Companies and Private companies also offer fixed deposits.

Banks are considered as the safest bet for investment in to fixed deposits. Banks borrow money from the investors at a fixed rate and lend the same to the individuals as well as institutions. The Fixed deposit rate i.e. the rate of return which an investor gets on the principal invested, varies from bank to bank. Most of public sector banks offer good yield on fixed deposits where as private sector banks offer lower yield on fixed deposits. Currently, fixed deposit rates are varying from 4% to 11.00%. Most of the banks offer 0.5% to 1% over the normal fixed deposit rates to senior citizens.

a.      The new generation banks, like Tamilnadu Mercantile Bank, Karur Vyasa Bank, Kotak Mahindra Bank, Lakshmi Vilas Bank offer high fixed deposit rates compared to the other big names in the banking sector. The deposit rates offered by these banks are between 8.5% to 10.5% for all tenures.

b.      Most of the banks provide 0.5% higher interest rates for senior citizens if the tenure is more than 1 yr. But if tenure if lower than 1 yr, the interest rates remains same for senior citizens also. This is widely true, but some banks like Axis bank gives 1% higher interest to senior citizens.

c.      Most of the foreign banks like RBS, Citibank, Standard Chartered offers low-interest rates which ranges from 6% - 7.5%.

Lot of banks offer high interest rates for special tenures like 500 days, or 555 days or 1000 days, but they have some restrictions which people don’t know like

1.      Some banks have provision, if rates increase in future, you can not apply for extension at higher rate of interest, instead you have to close that account and apply for new one. I.e. Automatic renew is not possible and upon maturity, you will not be able to get overdue interest.

2.      Sometimes, investor cannot do premature closure of deposit.
However, these conditions vary from bank-to-bank.

Corporate fixed deposits are normal fixed deposits offered by Companies. The interest rates  offered are generally higher than Bank interest rates and can be in range from 8%-15% . Higher the interest rates offered higher are the risks involved.

When companies have cash crunch or Company wants to expand the business and require money, they can offer deposits at attractive rate of interest to common public, one of the reasons for this can be that they do not want to raise the additional capital by issuing shares.

Fixed deposit rates change based on the Interest rate scenario changes in the country. In the high interest rate scenario where RBI Tightens the monetary policy by increasing the Key rates for Banks, the banks also increase the Deposit rates and lending rates. The highest interest rate scenario is the best time to invest into Fix deposit.

Few years back, fixed deposits were available around 6-8% depending on the bank and tenure. But today it’s a different scene. Fixed deposits rates are high these days and you can observe one of the other bank announcing fixed deposits rates revised each month and in range of 9-10%.

The interest income from Fixed deposit is taxable under the head of income from other sources. The only point is if you are in high tax bracket, most of the returns will go towards tax, but for investors who are in lower tax bracket of 10% or below the permissible limits, they can look for these options without much thought.

FDs with the investment tenure of 5 years can be claimed under section 80 C, which gives the deduction upto Rs. 1 lakh.

Before investing into Fix deposits needs a key aspect to be considered,

1.      Check the interest rates, high interest rate should not come with lots of conditions.

2.      Terms and condition on Interest payment and premature closure should be clear.

3.      Try to avoid premature closure, choose the period according to your time horizon.