Bank fixed deposits are more attractive than you think

Fixed deposits (FDs) being the flavour of the season with their attractive interest rates and terms, I will discuss how you can get maximum benefit out of this instrument with respect to tax as well as returns.

By investing in FDs with banks you can avail tax benefit under Section 80C. Moreover, you need not commit your funds for a very long period.

There is an assurance in advance about the returns, which is fixed for entire tenure of the investment, implying your investment is risk-free. This new product of investment i.e. term deposit scheme popularly known as fixed deposit scheme offered by banks was introduced in the budget of 2006 with effect from April 1, 2007.

Features of investment: Any individual or an HUF can invest up to Rs1 lakh under this scheme. The investment has to be made in the form of a FD with any scheduled bank for a minimum period of five years.

The maximum amount up to which a person can invest under this scheme is capped at Rs1 lakh. The minimum amount is also capped at Rs100. You can invest further money in multiple of Rs100.

The FD under this scheme can either be opened in single name or in joint names of not more than two persons — one of whom can even be a minor. But the deduction available for investment under Section 80C can only be claimed by the first holder.
Hence, you should ensure that the person contributing the money is named as the first holder of such FDRs (Fixed Deposit Receipts).

Restrictions on pledge and early encashment: In my article on February 15 on National Savings Certificates (NSCs), I had mentioned that the NSCs can be pledged with government, banks including co-operative banks or cooperative credit societies for taking a loan.

But this facility of pledging and taking loan against these bank FDs is not available. Even you cannot go for premature encashment of these deposits before completion of the period of five years. So, it is important that you plan in such a manner that you do not need this money for next five years.

However, the deposit can be transferred from one branch of the same bank to another branch of the same bank (and not other bank). So if you are moving from one city to another, your fixed deposit can move with you.

Though the FD has a lock-in period of five years but in case the first holder or the sole holder dies during the term of the deposit, the second holder or the legal representative or nominee of the deposit can request for premature withdrawals of deposit under this scheme.

Rate of interest: These FD schemes fare better than NSCs where the rate of interest is only 8% whereas these FDs presently offer  you interest up to 9.25% and that, too, for shorter term of five years against six years for NSC.

These FDs are even better than deposits under senior citizen scheme where the highest interest being offered is 9% whereas FDs offer 9.75%.

You should know that the interest earned on such fixed deposits is taxable that on interest earned on NSCs and under Senior Citizen Scheme.

The bank will deduct tax at source on the amount of interest given to the investor.

One more attractive feature of these fixed deposits as an investment avenue is that the rate of interest is fixed at the time of making the investment and is not subject to any change in the future.

Therefore, it helps you in planning your future cash flows more accurately to meet your future cash requirements.

The other beneficial feature is its tenure of five years. This is helpful in case you do not want to block your money for longer period like in PPF account where the money remains normally blocked for 15 years.

This is particularly important for you in case you need to have access to your money for any short-term goal in the near future like buying a house or providing for children’s education or marriage expenses.

Other features: For making investment in FDs you need to have PAN which shall be mentioned on the FDR with other details like name and address of the person making the deposit. You should be careful about preserving these FDRs because in case you lose it or it is destroyed, you will have to follow an elaborate procedure for issue of duplicate FDRs. This involves furnishing indemnity bonds and getting either sureties or bank guarantee.

Nominations: One can appoint one or more persons as nominee to receive the money in the case of death.  The nomination form can be filled either at the time of making the deposit or any time thereafter. However, in case the deposit is made for and on behalf of a minor, no nomination can be made in respect of such deposits.

In case of death of the deposit holder, the nominee can claim the money from the bank on the basis of death certificate of the original holder.

In case the nomination is made in favour of more than one person, all nominees will have to sign the necessary documents in order to claim the money from the bank in respect of the deposits held in the name of the deceased.

The writer is CFO, ApnaPaisa.com, a price comparison engine for loans, insurance and investments. He can be reached at balwant.jain@apnapaisa.com.