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Bank deposits safer than informal saving schemes

FDs and RDs are also the best options for long-term savings to achieve financial goals, if you can afford to invest only small amounts

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Fixed Deposits (FD) and Recurring Deposits (RDs) remain one of the most popular saving instruments for customer segments, that have so far been out of the ambit of formal banking channels. These offer such customers a secure option for their savings in comparison to informal and riskier savings options like chit funds. 

Assured returns and other advantages

Investment in FDs guarantees a customer an assured return, which is generally over and above the returns offered by a typical savings bank account. Banks are now innovating on FD and RD variants. Starting from attractive rates of interest like 8to 9 %, banks now offer additional advantages like low cost of entry, premature withdrawal without penalty and ability to partially withdraw in case of an emergency. The underlying principle behind such features is the simple recognition that customers often face liquidity challenges and do not wish to lock funds in non-breakable deposit schemes or options where there is a high penalty to be paid. 

For senior citizens most banks offer an additional rate of 0.5%, which at 8.5% or 9.5% becomes one of the best and secure options of growing their money rather than invest in risky asset classes. 

Safer than informal savings 

FDs and RDs are also the best options for long-term savings to achieve financial goals in your life. If you have financial targets for the future (child’s higher education or marriage, buying or building a house, purchasing an asset like a two wheeler, etc,) and can afford to invest only small amounts, then opening a recurring bank deposit is an ideal choice. At the end of the targeted tenure, you will have a handsome corpus in your account. 

FDs and RDs score over chit funds in many ways. Chit Funds are not regulated like bank deposits. There has been a history of unorganised chit funds or similar structured schemes duping depositors with improbable rate of interest offers, which eventually can never get paid out. Investing in a chit fund may result in an immediate benefit of getting a chunk of money at short notice, but can also result in a loss when seen in the long run on interest pay out and final gains. More than often customers do not have full transparency or understanding of pitfalls.

What is also perhaps not widely known and is a significant advantage of safety of FD’s over other alternatives is that the Reserve Bank of India, through Deposit Insurance and Credit Guarantee Corporation (DICGC) insures every bank customer on their savings and FDs. 

Each bank depositor is insured up to a maximum of Rs 1 lakh for both principal and interest amount held by him/ her in the unlikely or unforeseen event of a bank failure. This is a huge benefit for the customer and a safety net for their hard earned monies.

Taxation on FDs

FDs have multiple variants all of which are easily available and accessible. Tax Saving FD allows one to invest to save tax under Section 80c of the Income Tax Act. Tax saving FD being a debt investment is a safer option than equity based options like ELSS schemes. Returns on tax saving FDs are also guaranteed by banks and is fixed for the term of the FD. But a point to be kept in mind is that interest earned on FD is fully taxable as per Income Tax rules and consumers will pay tax depending on the tax bracket they fall in. Typically, this tends to shave off on an average 1-1.5 % from the final rate, again depending on the tax bracket the consumer falls in. However, there is a relief senior citizens. On submission of Form 15 H by a senior citizen customer, interest earned up to Rs 3 lakh is non-taxable for those in the age group of 60 to 80 years and up to Rs 5 lakh for those above 80 years.

Digital innovation

Lastly, banks have taken several strides in ensuring paperless opening of a FD or RD of Know Your Customer authenticated customers using the latest digital technology of net banking. This enables customers to open FD or RD in less than a minute, saving them the trouble of a physical visit to a bank branch and signing multiple forms. Customers can also cash out or break their deposits and transfer money out in emergency situations, which is not the case when compared with informal savings options in terms of a financial emergency or crisis. These advantages make FD products a better, secure and more convenient offering in the long run.

The writer is chief marketing officer, Ujjivan Small Finance Bank

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