Fixed Deposits (FDs) are a popular savings tool in India. They offer safety and stable returns. Understand the key aspects of FDs. These include interest rates, tenor options, tax implications, premature withdrawals, and safety.
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Difference in Interest Rates
Interest rates for FDs differ between banks and NBFCs. Banks usually offer lower rates compared to NBFCs. This is because NBFCs take higher risks. They offer higher returns to attract investors.
Here are some NBFC interest rates for 2024:
| Issuers | Maximum Interest Rates | Maximum Tenors | Minimum Deposit Amount |
| Bajaj Finance | 8.85% p.a. | 60 months | ₹15,000 |
| Shriram Finance Limited | 9.40% p.a. | 60 months | ₹5,000 |
| PNB Housing Finance Limited | 7.75% | 120 months | ₹10,000 |
| AU Small Finance Bank | 8.24% | 120 months | ₹1,000 |
These rates can vary based on the deposit amount, tenor, and the depositor’s age. Senior citizens often receive a higher rate of interest, usually an extra 0.25% to 0.50% p.a. Banks offer more conservative rates. They manage large customer bases and maintain strict regulatory compliance. NBFCs offer higher rates to compensate for higher risk profiles. They also attract more deposits for their lending and investment activities.
Check the latest interest rates on the official websites of banks and NBFCs before investing. Rates change based on economic conditions and policy decisions by the Reserve Bank of India (RBI).
Tenor Options
FDs come with flexible tenor options. These range from 7 days to 10 years. Here are typical tenor categories:
- Short-term FDs: 7 days to 1 year
- Medium-term FDs: 1 year to 5 years
- Long-term FDs: 5 years to 10 years
Short-term FDs are useful for meeting near-term goals. They can help with planning a vacation or managing an emergency fund. They provide liquidity with relatively stable returns. Medium-term FDs are ideal for balancing liquidity and returns. They can be used for medium-term financial goals such as buying a car or funding a child’s education. Long-term FDs are suitable for long-term financial goals. These include retirement planning or buying a house. They offer the benefit of compounding interest over a longer period.
When choosing a tenor, consider your financial goals and liquidity needs. Breaking an FD before maturity can lead to lower returns due to penalties. It’s important to choose a tenor that aligns with your financial plans.
Tax Implications
Interest earned on FDs is taxable. It falls under the category of “Income from Other Sources.” Issuers deduct Tax Deducted at Source (TDS) if the interest exceeds ₹40,000 in a financial year. This applies to general citizens. For senior citizens, the limit is ₹50,000.
Section 80C of the Income Tax Act, 1961 allows a deduction for investment in tax-saving FDs. These have a lock-in period of 5 years. The maximum deduction is ₹1.5 lakh per annum. However, the interest earned on these tax-saving FDs is taxable.
To avoid TDS deduction, submit Form 15G if you are below 60 years. Senior citizens can submit Form 15H if their total income is below the taxable limit. It’s important to account for the interest income when filing your tax returns. This helps avoid any penalties from the Income Tax Department.
Understanding the tax implications of FDs aids in better financial planning. It also helps in maximising post-tax returns.
Premature Withdrawals
Premature withdrawal of FDs is possible but comes with penalties. Banks and NBFCs usually reduce the interest rate if an FD is broken before maturity. This rate is lower than the contracted rate. Some banks also charge a nominal penalty fee, which can be 0.5% to 1% of the interest.
For example, if you have an FD with an interest rate of 6% p.a. and you withdraw it prematurely, the bank might only give you 4.5% p.a. and charge an additional penalty. This reduces the overall returns significantly.
Premature withdrawals should be avoided unless absolutely necessary. Consider other sources of funds or take a loan against your FD instead of breaking it. Many banks and NBFCs offer loans up to 90% of the FD amount at interest rates 1-2% higher than the FD rate. This way, you can meet your urgent cash needs without affecting the returns on your FD.
Which One is Safe for Fixed Deposits?
Both banks and NBFCs are regulated by the Reserve Bank of India (RBI). However, bank FDs are considered safer. Banks have stringent regulations. They offer insurance cover up to ₹5 lakh per depositor. This is provided under the Deposit Insurance and Credit Guarantee Corporation (DICGC).
NBFCs, while regulated, do not offer such insurance. They also carry higher risks due to the nature of their lending and investments. Many reputed NBFCs have a good track record of paying back deposits on time. They also offer attractive interest rates.
When choosing between banks and NBFCs for FDs, consider the following factors:
Regulatory oversight
Banks are subject to stricter regulations.
Insurance
Bank deposits are insured up to ₹5 lakh.
Interest rates
NBFCs generally offer higher rates.
Issuer’s credibility
Check the credit rating and reputation of the NBFC or bank.
Investors should choose FDs based on their financial goals. They should also consider their risk appetite and the issuer’s credibility. Always compare interest rates and terms before investing. Diversify your investments between banks and NBFCs to manage risk. This approach can also maximise returns.
Conclusion
FDs are a reliable savings tool. They offer stable returns and flexible tenor options. Tax implications and premature withdrawal policies are important considerations. Bank FDs are generally safer due to regulatory oversight and insurance cover.
Investors should choose FDs based on their financial goals and risk appetite. They should also consider the issuer’s credibility. Always compare interest rates and terms before investing.
