Bank FDs offer more than safe returns

The spotlight is back on the safe and secure bank deposit once again, thanks to the relief on Tax Deducted at Source (TDS) as announced in the interim Budget. Though this TDS relief does not mean doing away with income tax liability since interest income will be still be taxed, it is expected that banks will heighten their efforts to collect retail deposits. Besides, with the new financial year still some time away, banks may be expected to hold deposit interest rates at current levels as they would like to show deposits in their books for this fiscal. This gives retail investors a chance to take a fresh re-look at bank deposit options. Do remember the interest rates earned in banks may not be great when adjusted for inflation and taxes, but the guarantee and safety of deposits are unparalleled. DNA Money takes you through a range of options.

Recurring deposit variants

Recurring deposits, or RDs, are a common way of saving. It helps you to deposit a fixed amount every month, on a fixed date into a recurring deposit account and earn interest at the rate applicable to fixed deposits. Think of RDs like a Systematic Investment Plan (SIP) of banks. Unlike fixed deposits where you need a lump sum, say Rs 1,000 to Rs 10,000, to start, an RD allows you to deposit smaller sums. For instance, State Bank of India allows you to do monthly deposits of minimum of Rs 100 and in multiples of Rs 10. Some, like HDFC Bank, allow you to set instructions to convert your RD into an FD at maturity.

The usual period for RDs ranges from six months to a maximum of 120 months. Normal RDs levy a penalty charge for non-deposit of monthly installments, and in case of consecutive installments not received, the account may be prematurely closed and balance paid to the account holder. This is why some banks offer flexible RDs. For instance, ICICI Bank has iWish, a flexible RD where you create goals to save for your dreams. These type of flexible RDs work give you the added flexibility of depositing any amount at any point in the tenure. Multiple deposits can also be made in one month. Also, there is no penalty or charges for missed deposits.

Fixed deposits

FDs are the bread and butter for not only banks, but bank customers too. FDs are a one-stop solution for employed (with regular income) and self-employed (with lumpy income). All you need is the money. You do not even need to have an account at a bank to open an FD (though banks will open an account for you if there is a large FD). FDs are offered by all banks, big, small, foreign and even the new category of lenders like small finance banks (SFBs). Usually, there is a minimum amount of Rs 1,000 for an FD, but there is no maximum amount. Of course, deposits of Rs 1 crore or above are at bank branch manager discretion. FD tenures, usually range from seven days to 10 years.

FDs come in two basic forms. The first one, the most common, allow you to do premature withdrawal before the maturity tenure. If you withdraw prematurely, you will be charged a marginal penalty. Some banks offer FDs without premature withdrawal facility. These FDs are often of higher ticket sizes. To compensate for the lack of premature withdrawal, banks offer higher interest rates. For example, normal FDs with five to 10 year specific tenure will earn you 7%. For FDs with no premature withdrawal, the same five to 10 year tenure, offers a higher interest rate of 7.60%.

Banks also offer higher than normal FD interest rates for big deposits. For instance, Axis Bank's Fixed Deposit Plus gives you a higher rate of return compared to regular FDs and the option is available to all non-resident and and domestic customers. The interest rate is available on a simple or compounding basis for a minimum amount of Rs 15,00,001. Some banks offer special rates for special tenures. For example, Yes Bank offers a 7.5% interest rate for the tenure of 12 Months 10 days to 12 months 20 days, and 7.85% for 18 months 8 days to 18 months 18 days.

Experts feel the Budget proposal of TDS relief will help banks shore up deposits. "The government has raised the TDS threshold on interest earned on bank/post office deposits from Rs 10,000 to Rs 40,000. This is marginally positive for bank deposits growth and will likely boost the attractiveness of bank deposits v/s other savings products. The increase in the TDS threshold could slow down the dis-intermediation of bank deposits, in our view, and help banks access low-cost deposits. We believe retail deposit gathering will be critical in sustaining above-industry growth rates in loans for banks," say Vishal Goyal and Ishank Kumar, analysts, UBS Securities India in a note.

Sweep-in facility

Many bank customers tend to accumulate cash in their savings account. There is nothing wrong with it, but the fact is that money could be used better in terms of interest. The standard rate for a normal savings account is 3.5-4%. An FD offers more but the money cannot be intermittently withdrawn or added as per your wish. This is where the sweep-in facility is handy. The sweep-in facility helps you enjoy liquidity in your savings account while earning high returns with the applicable interest rates of a fixed deposit.

In case you are falling short of funds in your account, the deficit will be withdrawn from your FD. Do remember only the principal amount of the FD will be considered for the sweep-in facility. TDS in interest is applicable to the term deposits. The deposit tenure is 30 days to 24 months in case of banks like IndusInd. Nomination facility and premature closure are allowed.

Goal-based deposits

Like mutual funds and insurance companies that often structure products around life goals, banks have also started having goal-based deposits. These FDs come with goals like travel, investment, vacation, etc. For example, IDFC Bank Travel Saver deposit allows you to save for your dream holiday in 12 easy monthly installments and earn 7.25 % per annum + a top up from Thomas Cook (the 13th installment towards your holiday package). These kind of options are better than taking loans and paying 12 EMIs.

Recently, ICICI Bank launched FD Invest option, as part of FD XTra range. It offers customers the safety of a FD and the growth opportunity of a mutual fund SIP. FD Invest helps you earn monthly interest on your principal invested and the same interest is invested in MF SIP. The minimum FD amount that would be required for FD Invest would be Rs 2 lakh and tenure ranges from 12 months to 10 years. Pranav Mishra, Head – Retail Liabilities Group, ICICI Bank said, "Fixed and recurring deposits have long been a fundamental investment for most investors, irrespective of their risk profile. With the prevailing volatility in financial markets, we see a renewed interest by customers to invest in fixed and recurring deposits as they offer a combination of attractive interest rates, liquidity, safety of capital and assured returns. These deposits are aligned to various life-goals of a customer like protection through a term plan, option of investing in equity markets through mutual fund SIPs or planning for requirements like higher education, retirement corpus, travel among others."

SECURE FUNDS

• Following the rate cut by the Reserve Bank of India, it may be a good time now to lock in some of your money in bank FDs before interest rates start heading down
   
• In addition to earning assured returns you can link your deposits to goals, sweep in the extra cash into higher earning FDs, etc
   
• One drawback is that interest income from bank FDs are taxable and often don't beat inflation