Top tips for investing in fixed deposits

Fixed deposit interest rates are regulated by the government. It’s better if you split your FD into different parts that have different tenures, so that all your funds are not locked away and you can take advantage of any fluctuation in interest rates. A premature withdrawal of a fixed deposit means lower returns. It is very important to be cautious of attractive interest rates for the long terms. In such cases you may be penalized for the premature withdrawal, but the interest offered on your deposit is low. The interest earned on a fixed deposit is fully taxable and if your interest exceeds Rs 10,000 per annum, banks are obliged to pay a TDS of 10.3% before you get your funds. rnAfter this, you will have to show the income from an FD in your tax returns. Fixed deposits in banks are secured by the Deposit Insurance and Credit Guarantee Corporation, up to a limit of 1 lakh. Corporate deposits are unsecured loans and many investors have lost money in such schemes. rnFixed deposit interest rates in India are high; however before investing in an FD, it is important to check the charges applicable for a premature withdrawal. These deposits will be extremely useful to you when you have to withdraw the funds in case of an emergency. rnAnother thing to look out for is the rate of compound interest. A higher rate of interest which compounds very few times will lead to a lower yield as compared to a lower rate of interest which compounds at a much more frequent basis. rnIt’s better to get a deposit where the interest is compounded on a monthly or quarterly basis than on an annual basis. Senior citizens are offered slightly enhanced rates of interest on fixed deposits. It is advisable to take advantage of these higher fixed deposit interest rates by investing in your parent’s names. rnMost banks offer between 0.25 to 0.75 percent above the normal interest rates to senior citizens. Whenever you open a fixed deposit, it’s very essential to appoint a nominee as this enables a hassle free transfer of accounts. The nomination facility gives the bank the power to release the funds to the nominee directly with minimal paperwork. Most banks now offer low interest loans or overdraft against FDs. These loans are offered at interest rates that are lower than standard rates and also limited to 90 percent of your FD amount. In case of a default of payment, the bank will help you to recover the funds from your FD. Banks also offer credit cards whose credit limit is linked to the amount of funds in your FD account. The main benefit is that the processing time is shorter for such cards as compared to the processing time for a normal application process for a credit card. Some banks may even sweep-in excess funds from your savings accounts into the fixed deposits. Excess funds from your savings account may be transferred to new fixed deposits of a predetermined tenure and the interest is directly paid to the account.