Opt for FD with compound interest to grow your investments faster

Last Updated : May 19, 2016, 11:53 a.m.

One should always try to create a pool of savings by investing money in various financial instruments. The reason could be the education and marriage of your child, or the need to buy car and home, etc. But there is always an element of risk with financial instruments. So, you must choose the one that will safeguard your financial interests by offering regular returns on your investment. And fixed deposit is one such instrument that can serve your purpose.

Fixed deposit provides returns at a higher interest rate compared to the normal savings account. Fixed deposit interest rates range up to 10% per annum, while the same on savings account is around 4%-6% annually.

You can open FD account in the multiples of Rs 10,000 for different time periods. You can open your fixed deposit by either going to the bank branch or through net banking. You will receive the sum of principal and interest on your fixed deposit at the time of maturity. Thereafter, you will have the option to either withdraw the maturity sum or reinvest the proceeds in the fixed deposit account. Choice is yours. However, one must keep few things in mind with regards to fixed deposits in India.

Opt for FD with compound interest

Select an FD offering interest on a compounded basis to get higher amount at the time of maturity. Compound interest is ascertained on the initial principal as well as the interest accumulated during the period of deposits. In nutshell, you can say compound interest is the interest on interest that makes the return on your investment grow at a faster rate.

Split investment to cut down taxes

Suppose if there is a fixed deposit (FD) plan of Rs 5 lacs, then make sure you split it into different FDs of Rs 1 lac each and deposit the sums across different banks. The reason being the deposit insurance is applicable up to the amount of Rs 1 lac. This will help you reduce the tax burden as well as ensure a regular flow of income while at the same time safeguard your investments.

Research in-depth to eliminate risk

Don’t get lured by the higher interest rates on fixed deposits issued by companies, non-banking finance companies (NBFCs) and cooperative societies as the risk factor there is huge. So before you open FD at these entities, make sure you research in-depth about their financial health. Also, pay heeds to the investment grades offered to these firms by rating agencies like CRISIL. Choose the firm that will get a good rating and forego the one with a poor rating.

Move away from tax-free illusion

Interest earned through fixed deposits is tax adjusted and not tax-free, an illusion that most of the people carry. This interest income gets taxed under the head ‘Income from Other Sources’ depending on the slab that you may have. Interest income of up to Rs 10,000 on FD is exempted from tax. Above Rs 10,000, banks will charge Tax Deducted at Source (TDS) at the rate of 10% if PAN details are there. Else, 20% TDS will be deducted. You can avoid TDS by submitting Form 15G and Form 15H if the taxable income falls below the basic exemption limit. Form 15G is to be filled by individuals below 60 years, trusts and HUFs, while Form 15H is applicable for the senior citizens. Fixed deposits of amount up to Rs 1 lac for a period of 5 years gain tax exemption under Section 80C of the Income Tax Act.

(Updated on:31st October,2016)