Most citizens in India tend to deposit their capital in Fixed Deposits (FD) accounts because bank FDs are stable/secure and also comes with a lock-in period 0f 5 years. The principal amount is invested at a fixed interest rate on bank-fixed deposits which enables you to generate high and secure returns. Therefore, it is essential to opt for a bank/lender who is providing higher interest rates on FD in order to fetch a higher maturity amount.
An FD also comes with a cumulative option with a tenure ranging from 7 days to 10 years. The major disadvantages of FD are liquidity and premature withdrawal (which is applicable by paying a penalty), but apart from this, it is essential to consider the following things before opening an FD account.
1. Applicable interest rate: The rate of interest provided for fixed deposits ranges from bank to bank and period of investment. The interest on the deposit amount is payable on a monthly or quarterly basis which can also be re-invested by the account holder.
2. Interest payment options: In order to receive interest payment an investor can opt from cumulative option or non-cumulative option. Under the cumulative option, the principal amount along with the interest earned on the investment is reinvested and paid at maturity.
3. Loan facility: One can also avail a collateral loan against his / her fixed deposit account. However, the loan amount varies from bank to bank and principal deposited.
4. Account type: Tax saving fixed deposit can be availed by a single or joint account holders as per the preference of primary account holder. However, in the case of a joint account, the first account holder can only reap the tax benefits.
5. Premature withdrawals: Generally premature on FDs are not allowed but one can break his / her fixed deposit account before the maturity date in case of an emergency. However, it is essential to keep in mind that a penalty will be charged which varies from bank to bank on premature withdrawals.
6. Tax: Interest earned is fully taxable on a fixed deposit hence the tax is levied on the interest earned on an FD account as per the individual's tax bracket. TDS is also applicable on a fixed deposit, but one can avoid TDS by submitting Form 15G or Form 15H (as applicable) to the respective bank.