Bank Fixed Deposits

A bank FD is a savings instrument where you deposit an amount with the bank for a fixed duration.You earn a fixed rate of interest on this investment. The interest rate is fixed at the time of the investment – even if interest rates change during the tenure of the FD, the interest that you earn on your FD remains fixed. A FD is also called a Term Deposit at times, as it is an investment for a pre-defined term.

All banks have their own rules on minimum deposits.Most nationalized banks will start a FD with just Rs.1000.

The tenure of a FD can be anywhere from 15 days to 10 years.The rate of interest offered on a FD depends on various parameters: the prevailing interest rates, the duration of the FD, the amount of the FD, your age, etc.Usually, the longer the tenure of the FD, the higher is the interest rate.However,when the economy has a liquidity crunch,banks do offer higher rates on short-term deposits too.They also come out with Special Term Deposits of more unusual tenures such as 555 days, 1001 days etc.Most banks offer a different rate of interest on FDs of more than a certain amount, usually Rs. 15 Lakhs.Also, most banks offer an extra 0.5% per annum to Senior Citizens.Some banks also offer different rates for Trusts and Societies.

When shopping around for good rates.Remember to check how frequently the amount is compounded.Monthly compounding is better than quarterly compounding and half-yearly better than annually.Also beware that some banks advertise an annualized rate.So be sure to compare apples with apples not oranges.Here is a link to a calculator to check up on the math:http://www.1728.com/compint.htm

You have two options for receiving the interest from a FD:
1. Periodic Interest: You can choose to receive the interest monthly, quarterly or half-yearly. In this case, the interest would be deposited to your bank account every month / quarter / 6 months, and your invested amount would be credited to your bank account at the time of maturity.If you opt for receiving the interest periodically, you would earn only a simple interest on your investment. That is, you would earn interest on your original investment, but not on the interest that you earn from it.

 2. Cumulative: You can choose to receive the interest at the time of maturity of the FD. In this case, the invested amount and the interest would be deposited to your bank account at the time of maturity of the FD.When you opt for cumulative interest, you earn compound interest on your investment. That is, you earn interest not only on your original investment, but also on the interest earned on it. (This is because such interest is automatically reinvested in the FD by the bank)

When you open a FD, you receive a certificate as above that mentions the invested amount, the interest rate and the maturity date, apart from some other details.If you opt for the cumulative option for getting the interest, the maturity amount would also be mentioned on the FD certificate.If you open a FD online through the internet banking facility of your bank, you might not receive a FD certificate. In such cases, it would be there as an entry in your online account.

Although you invest for a fixed duration, you can withdraw the amount earlier than the maturity date. This is called “breaking” the FD.All banks allow breaking a FD. They usually have some penalty for this – either in the form of a reduced interest rate, or a charge as a percentage of the invested amount,etc.

Apart from this, one thing that needs to be kept in mind is that if the interest earned from FDs kept by you in a single branch is more than Rs. 10,000 in a financial year, the banks deduct income tax on it – there is a Tax Deducted at Source (TDS) at the rate of 10% of the interest ( 20% now if you have not submitted a copy of your PAN card ).At the end of the year, the bank issues you a certificate (Form 16A) that mentions the income tax withheld by it on the interest that you earned on your FD. When you fill your IT return, you can claim this as tax already paid by you.

Chasing high rates is a good idea but compromising on safety of capital is not.So make sure that the bank you pick is a Scheduled Bank.These banks have Deposit Insurance guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC). However this insurance is available only up to Rs. 1 Lakh per person per bank branch.Thus, if you have 5 FDs of Rs. 50,000 in the same bank branch, you would be insured only up to Rs. 1 Lakh in all. But if you have 5 FDs of Rs. 50,000 in different branches of the same bank, or in different banks, the entire amount of Rs. 2.5 Lakh would be insured (as Rs. 1 Lakh per person in a per-branch limit).

FDs are  good low-risk investments.But the return from FDs can normally beat inflation only by a small margin,if that. Therefore, you should not park all your money in FDs.However the money that you want to keep aside for an emergency / contingency find can be kept in an FD.Also, amount that you want to invest for a short-term can also be invested in FDs.