Maximize Returns On Your Fixed Deposits

6 minsOctober 5th, 2018

Even in the world of exotic investment products, bank fixed deposits occupy an important place in the portfolio, because:

  • A bank fixed deposit offers a fixed and secured return, unlike market-linked instruments;
  • Can address your liquidity needs (if the plan and tenure is thoughtfully selected)
  • Can address your short-term goals and contingency needs
  • Can come to your recourse when you’re in dire need of money vide a loan against loan against FD and
  • Help in tax planning as well--with a 5-year tax-saver bank fixed deposit

Particularly, if you are averse to taking risk and looking to build wealth securely and steadily, you cannot ignore investing in bank fixed deposits (FDs).

Moreover, from an asset allocation and diversification standpoint, it is sensible to hold some money in fixed deposits.

This is the reason most individuals (and even institutions) invest in bank fixed deposits. But ensure that you book your bank fixed deposit with a bank that offers a hassle-free experience after evaluating its financial strength and promoter history. And once you do that, here are things to do maximise returns on your fixed deposit/s.

  • Lock-in when interest rates are high
    • This is the best time to book your bank fixed deposit to yield a better rate of return. Be wary of banks that offer an extraordinarily high rate of interest. Keep in mind: with a higher rate of return comes high risk.
  • Select your tenure and plan thoughtfully
    • Ideally, invest for the long-term. The return earned on a bank fixed deposit can counter inflation with the power of compounding in the long run. Having said that, your investments must be aligned with your financial goals and liquidity needs.
    • So, say you’re planning for a short-term goal which is a few months away or building a rainy day fund, booking a short-term fixed deposit (choosing the cumulative plan) would prove far more sensible as opposed to opting for a longer tenure and prematurely withdrawing the fixed deposit at a penalty.
    • On the other hand, if you are planning for a long-term financial goal, booking a longer maturity fixed deposit (choosing the cumulative plan) would be prudent. Correspondingly, a senior citizen who would like to draw a regular source of income can possibly consider between monthly or quarterly interest pay-outs directly to his/her bank account.
    • When you decide on the tenure of the fixed deposit thoughtfully, you would not need to park more money in a savings bank, which yields a lower rate of interest.
    • If you aren’t sure about the tenure, a flexi fixed deposit can be useful. Consider, Axis Bank’s Encash 24 Flexi Deposit that takes care of your liquidity needs and earns a high rate of interest.  Axis Bank’s Encash 24 Flexi Deposit can be linked to your Axis Bank savings account facilitating automatic transfers in multiples of Rs 5,000 to a fixed deposit when the balance in the savings account crosses Rs 25,000.
    • And the money in fixed deposit can be accessed easily via a cheque or ATM withdrawals. This amount is automatically reverse-swept from the most recently formed FD (in units of Rs 5,000) to your savings account whenever the balance in the latter (i.e. savings account) falls below Rs 25,000.
    • If you wish to invest in ‘Encash 24 Flexi Deposit’ and know more, click here to know more about Encash 24 Flexi Deposit
    • Besides, opt between plans/options such as quarterly compounding (i.e. reinvestment of interest option), quarterly pay-out of interest, and monthly payout; depending on your cash-flow requirements.
    • Holding multiple fixed deposits in line with your financial goals and liquidity needs is an ideal thing to do, and keep reinvesting the maturity proceeds.
  • Do not prematurely withdraw your fixed deposit
    • Premature withdrawals counteracts with the power of compounding. Thus, if you wish to see your hard-earned money grow, avoid prematurely withdrawing your bank fixed deposit.

Instead, availing of a loan against your bank fixed deposit would be a far more sensible move. By pledging your fixed deposit with the bank, you can get access to 80-85% liquidity of your fixed deposit amount.

The interest rate for loan against FD is comparatively lower than for personal (unsecured) loans–– to be precise, just 2.0% above the interest rate earned on your bank FD. And note that interest is charged on the actual amount utilised and for the tenure of utilisation.

There are no EMI or post-dated cheques required, which is generally the case with other loans. As long as the bank FD is in force, you have the flexibility to repay the loan during that time period.  And the best part is, there are no prepayment charges on early closure. Once the loan is repaid in full, the fixed deposit––earning a rate of return –––is released by the bank.  .

In addition to the above factors, note that the interest earned on bank fixed deposit is taxable under the Income Tax Act, 1961. As per the prevailing rules, the tax is deducted at source by the bank.

The rate for Tax Deduction at Source (TDS) is 10% if PAN is furnished, and if not, then 20%. No surcharge or cess is levied over and above this basic rate.

TDS with respect to interest earned on your bank fixed deposit is deducted on the basis of the total interest projected on the aggregate of your bank fixed deposit for the financial year. This is in accordance to Section 194A of the Income Tax Act, 1961.

If the total projected interest in a financial year crosses the threshold limit, which is currently Rs 10,000 for non-senior citizens, TDS is deducted proportionately from the existing fixed deposits at the time of interest application.

For senior citizens (60 years and above), the union budget 2018 has increased the exemption of interest income on deposits with banks (includes fixed deposits) and post offices from Rs 10,000 to Rs 50,000. Thus, TDS will not be deducted for senior citizens, unless it crosses this new limit.

Therefore, when you invest in bank fixed deposit/s also assess the post-tax returns. In case, you have no other income apart from interest income in order to avoid TDS, you can submit a declaration under Section 197A of the Income Tax Act in Form 15-G (for general or non-senior citizens) or Form 15-H (for senior citizens), as applicable.

To sum-up…

A bank fixed deposit is a secure way to generate wealth and add to your financial security and well-being, provided you give it enough thought.

Investments can be done online, i.e. through internet banking or mobile banking––—from the comfort of your home, office, or wherever you are–––or even by physically visiting the nearest bank branch. And when you book a bank FD, make it point to have a nominee.

Book your bank FD today!

Happy Banking!

Disclaimer: This article has been authored by PersonalFN, a Mumbai based Financial Planning and Mutual Fund research firm known for offering unbiased and honest opinion on investing. Axis bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.