Fixed Deposit (FD) has been a staple investment option for Indians across income groups. With FD being a safe, reliable and straightforward way to grow money, it’s easy to understand why. Fixed deposits are a high-interest yielding Term deposit and offered by banks in India. The most popular form of Term deposits is FDs, while other forms of term Deposits are Recurring Deposit and Flexi Fixed Deposits.
Banks issue a separate receipt for every fixed deposit because each deposit is treated as a distinct contract. This receipt is known as the Fixed Deposit Receipt (FDR), that has to be surrendered to the bank at the time of renewal or encashment. However, investment options beyond FD also exist.
Think Mutual Funds (MFs), National Pension Scheme (NPS), Recurring Deposits (RD), Public Provident Fund (PPF) and RBI Bonds; the variety is simply overwhelming. But how does an FD account fare against all of them? Well, that’s what we uncover here, parameter by parameter.
The idea is to help you to informed decisions on Fixed Deposit
When investment security is a priority, Fixed Deposit (FD) is the way to go. The investment instrument is entirely detached from the market, unlike mutual funds and other market-linked schemes. Your returns are fixed, contractually safeguarded by the financial institution and monitored by RBI.
In a default scenario, the financial institution even cushions both, principal and interest with INR one lakh indemnity. No other investment vehicle offers this level of security. Public provident fund (PPF), however, is an exception, which comes with Government of India backing.
You invest to earn interest income, no two ways about it. The market-linked schemes offer a higher rate of interest, as your amount is directly invested in the market. Your earning may be higher but not assured, thanks to the volatile and risk-prone nature of the market. If the market performs well, you prosper.
But if it doesn’t, your investment suffers. On the other hand, fixed deposit interest rates are predetermined at the time of account opening and stay unchanged for the entire tenor. Expect up to 8.5% interest rate on your FD, depending on the bank, tenor and other factors. It’s slightly higher than Senior Citizens Savings Schemes and Public Provident Funds.
Public Provident Fund matches FD in terms of assurance and interest earnings but falls short on the liquidity front. The PPF requires you to stay invested for 15 years, and partial withdrawals are allowed only after five years, subject to specific conditions.
Conversely, FD guarantees you two interest payout options, cumulative and noncumulative. While the former ensures interest payout at maturity, the latter offers payouts monthly, quarterly, half-yearly or annually. With liquidity readily available at regular intervals, meeting your day-to-day expenses is easy.
The Section 80C of the Indian Income Tax Act, 1961 guarantees tax relief of up to INR 150000 on select investment options. It includes, but not limited to, National Pension Scheme (NPS), Public Provident Fund (PPF), Equity Linked Savings Scheme (ELSS), and Unit Linked Insurance Plans (ULIP).
A sum of INR 150000 is offset against your total tax liability across each tax saver instrument. The generic FD account does not feature in the tax-free list, but Tax Saving Fixed Deposit does. The Tax Saver FD is just like the normal FD, except for the tax benefits.
FD offers flexibility in lock-in periods to suit all investment needs and objectives. Feel free to invest for as less as seven days to up to 10 years in an FD. On the contrary, PPF involves 15 years, ELSS 3 years, NPS 15 years of lock-ins. Premature withdrawals are allowed but with a penalty. However, loaning facility is available against your FD, should you need funds midway the tenor.