How do fixed deposits (FDs) work?
People willing to park their money in FDs are required to keep a sum of amount with a bank for a particular period of time. On the basis of this, the investor gets a regular, assured rate of interest on his/her savings. The time for which one keeps this money with the lender varies and is pre-determined at the time of investment. A longer FD tenure typically fetches a higher rate of interest.What is the co-relation between FDs and income tax?
FDs are of two types: some are normal ones while others act as tax-saving instruments. However, income tax has to be paid on interest income accrued on both types of FDs.Unlike other FDs, the lock-in period of tax saving fixed deposits is five years. One of the major differences between normal FDs and tax-saving FDs is that the former can be redeemed before maturity, while the latter can't be redeemed before five years.
Under Section 80C of the income tax (I-T) Act, you can claim deduction for investments up to Rs. 1.50 lakh on tax-saving FDs. The amount so invested is meant to be deducted from the gross total income to arrive at the taxable income.
Should you invest in FDs?
"Surplus funds, if parked in a savings account, may end up getting consumed. FDs, due to their fixed investment horizons, can help one inculcate a savings behaviour. FDs are the best option for counter balancing the market risk from other investments in one's portfolio," said Mr Chandna.Further, FDs give the customer an option to choose the tenor of the investment horizon from a short-term period of seven days up to 10 years, he added.
A fixed deposit with monthly or quarterly interest pay-out option can generate monthly/ quarterly cash flow for a customer without impacting the principal invested, said Mr Chandna. Alternatively, for someone who is not looking at FDs for regular cash flows, the cumulative option, where the interest gets added to the principal on a quarterly basis, is also available, he added. Here, the interest is paid at the end of the tenure.
On maturity, customers can opt to re-book the entire amount for another tenor at the then prevailing rates or withdraw the FD and use the money for the purpose it was originally invested for, Mr Chandna said.
If you decide to invest your money in FDs for one year, here are the rates of interest that an investment of less than Rs. 1 crore will fetch from State Bank of India (SBI), ICICI Bank, HDFC Bank, YES Bank and Bank of Baroda:
| Bank name | Tenure | Rate of interest | Senior citizens rates |
| SBI | 1 year | 6.25% | 6.75% |
| ICICI Bank | 1 year to 389 days | 6.60% | 7.10% |
| HDFC Bank | 1 year | 6.75% | 7.25% |
| YES Bank | 1 Years to <= 10 years* | 6.75% | 7.25% |
| Bank of Baroda | 1 year | 6.60% |
(Also Read: Fixed Deposit Interest Rates Up To 3-Year Tenures; Interest Rates On Fixed Deposits Of 5-Years Or More)
