FDs: Nine points to remember before investing

Fixed deposit (FD) is one of the most common savings instruments that are widely used by the common people. It is a much-preferred instrument among the masses of the country and they get to know the amount they would receive on maturity at the time of investing.

The unpredictability factor in an investment made in FDs is almost negligible.

Some of them have tax benefits too.

An individual can quickly liquidate an FD to raise funds in the event of an emergency, but it might carry a penalty.

But before opening a regular FD, an individual should keep the following things in mind:

Tenure of deposit

Before investing in a new FD one should be clear about the tenure of the FD. The tenure of an FD usually varies between 7 days and 10 years or above. So according to the time of requirement of funds one should make the FD.

Minimum deposit amount

Please check the minimum amount for opening a FD. In SBI, the minimum amount is Rs 1,000 and on the other hand, in ICICI the limit is fixed at Rs 10,000, though a minor can open an FD with only Rs 2,000. In HDFC Bank, the limit is set at Rs 5,000.

Interest on FD

FD attracts different interest rates for different time periods.

So before finalising any deposit, an individual should check the interest rate along with the tenure. Senior citizens are entitled to get a slightly higher rate of interest rate in each and every tenure.

Tax exemption

FD returns are taxable as per the respective income slabs. Bank will deduct the TDS if the interest income exceeds the limit of Rs 10,000 in a financial year. A person should submit 15G/H to the bank to let them know to not deduct the TDS.

Five-year FDs which are tax-free are also popular with a lot of citizens.

Loan against FD

An individual can avail overdraft facility against FDs too. Overdraft and loan against FD are two options for borrowing money against fixed deposits.

The fixed deposit-backed overdraft cap is lower than the deposit amount, but the interest paid is higher than the applicable FD rate. A maximum of 90-95% of the amount in an FD is given as loan.

Premature withdrawal

Fixed deposits have a premature withdrawal option to withdraw money before the maturity date. The depositor will be allowed to pay a certain amount as a fine.

This is normally between 1% and 1.5% of the overall amount. Some banks allow you to make a premature withdrawal with no penalty.

You should know this clause before making the investment.

Auto renewal

FDs generally auto renew the corpus every year until the maturity date. One can choose the auto renew option in the opening form along with other details.

Nowadays, all public sector and private banks offer online facility for opening of FD and the option of auto renew is given. You can either tick it or leave it blank.

Nomination facility

Like other instruments, FD also has a option to nominee a person. While one opening a FD, he/she should fill up the nominee portion. Otherwise, in the case of death of the holders of the FD, the family members would face trouble in claiming the money.

Credit rating

Credit ratings are assigned to banks, other financial institutions from various national and international agencies. An AA or AAA rating is better than a BB or BBB rating, and so on.

Every depositor in a bank is covered up to a limit of Rs 5 lakh for both principal and interest amounts owed by her or him according to RBI guidelines.

Before making the deposit please check all these details of the bank.