What is Fixed Deposits
Fixed Deposits (FDs) are a type of investment offered by banks, post offices, and even corporates. Fixed deposits are considered to be one of the safest modes of investment. Fixed deposits are also known to generate high and guaranteed returns and set high-interest rates as compared to savings accounts. Fixed deposits have been a great avenue for those who are seeking ways to receive assured corpus with low levels of risks. Fixed deposits are a one-time mode of investment.
Bank FDs Versus Corporate FDs
Bank fixed deposits are fixed deposits provided by banks. Banks that offer fixed deposits could either be private banks or state banks. Banks usually maintain terms and conditions regarding their fixed deposit schemes. Banks may provide some supplementary offers for those customers who have created a savings account with them. Bank FDs are known to provide lower levels of liquidity.
On the other hand, corporate fixed deposits are fixed deposits provided by corporations or companies. Corporates usually feature ratings with regards to the safety of the deposit which are carried out by independent credit rating organizations such as ICRA, CRISIL, CARE among others. Corporate fixed deposits are known to provide flexibility in certain sections like in choosing tenure or terms of maturity as per the preferences.
Let’s compare both bank fixed deposits and corporate fixed deposits:
5 Year Bank fixed deposits offer tax benefits under Section 80C of Income Tax Act, 1961. On the other hand, corporate FDs are not eligible for claiming deductions under 80C.
As per budget 2020-21, Corporate fixed deposits would deduct TDS at the rate 7.5%, if interest income exceeds Rs. 5,000 annually. Whereas, Banks need to deduct TDS at the rate 7.5% if the interest income from FD exceeds Rs.40,000.
2. Interest Rates
Bank fixed deposits offer interest rates that are not certain for everyone, variation among interest rates depends upon tenures, age group of customers and other factors. Interest rates offered by bank fixed deposits are usually lower as compared to corporate fixed deposits. Corporate fixed deposits also offer varying interest rates depending upon the ratings, investment tenure & other factors.
Bank fixed deposits are known to be protected up to Rs. 5 Lakhs by Reserve Bank of India (RBI) as per the new DICGC rules presented in Budget 2020, which means customers have insured deposits up to Rs. 5 Lakhs in bank including all deposits with the banks. Bank Fixed Deposits are administered by certain regulations of the Reserve Bank of India (RBI) hence considered a safer option as compared to Corporate fixed deposits which may involve more risks.
Features of Fixed Deposits
Fixed deposits have been considered a great mode of investment due to some great customer-oriented features which are discussed below.
Fixed deposits usually have a tenure range of 7 days to 10 years. Interest rates of fixed deposits also vary in accordance with different tenures and other factors.
2. One-time investment
Fixed deposits are seen as single-time investment mode. For any customer who is willing to make extra deposits, there would be a requirement of opening separate deposit accounts.
3. Rate of Interest
The rate of interest on Fixed Deposits depends upon the investment tenures, market rates & other important factors.
The interest rates offered on FDs are generally lower than on other investment products. But at the same time they are less riskier than a number of other financial products.
Corporate FDs usually offer higher interest rates than the Bank FDs as they carry a substantially higher risk than the latter. Investors could however consider choosing high rated corporate FDs over lower-rated ones to avoid the extra risks of defaults associated with them.
4. Easy planning
Usually, Fixed Deposit offering institutions provide a Fixed Deposit Calculator which helps in planning out investment easily. Fixed Deposit Calculators can be used simply. Anyone who is willing to calculate their investment amount may put the desired investment amount and term and the Fixed Deposit calculator will help in providing maturity amount, payout amount, and interest which is earned. Other factors can also be ascertained by a fixed deposit calculator.
Benefits of fixed deposits
1. Safe mode of investment
Fixed Deposits are considered to be a safer mode of investment when compared to other investment modes available. Fixed Deposits provide a greater level of stability.
Fixed deposits offer guaranteed and stable returns. An investor can also use the benefit of Fixed Deposit Calculator to calculate returns with the help of entering principal amount, interest rate and tenure.
3. Premature/Partial Withdrawal
Certain institutions offer fixed deposit schemes with premature withdrawal facilities along with certain terms and conditions. However, investors might be penalized in certain cases of premature withdrawal which depend upon terms and conditions that fixed deposits offer.
4. Credit Card
Investors are allowed to avail credit card secured against the fixed deposit that they have invested in. Such credit cards may help investors to improve their credit score.
Investors are allowed to avail a loan against the fixed deposit. Fixed deposits that offer loan availing facilities are known to usually charge 1-2% lower rate of interest on loans.
6. Tax Benefits
Not all Fixed Deposits provide taxation benefits. Only those FDs which have a lock-in period of 5 years are eligible to be claimed for a tax deductions under Section 80C of Income Tax Act, 1961 for an amount up to Rs. 1,50,000 by investors.
Risks Involved in Fixed Deposits
Even though fixed deposits are considered to be one of the safe modes of investment available but still, it involves some risks which are important to know.
1. Risks involved in liquidity
Liquidity levels may depend upon different institutions offering their fixed deposit schemes. Tax Saving Fixed Deposits may not allow premature withdrawal, whereas on the other hand, normal fixed deposits offered by banks may offer easy liquidation facilities.
2. Default Risk
Bank defaults usually do not happen and are considered to occur very rarely. But there is always some level of possibility for default to take place. Nevertheless, the amount of deposit along with interest up to Rs 5 lakh per investor per bank is assured by DICGC in case of a default.
Corporate FDs also carry a default risk which is generally higher than the risk on bank FDs. Therefore it is important for investors to research completely before investing. There is the possibility of a situation where corporates are not able to return the money invested for several reasons. One way to understand the risk on a corporate deposit is to review the rating given by an independent rating agency. However, one must take into account that a high rating still does not guarantee zero default possibility.
3. Risks due to inflation
Inflation in simple language is the increase of goods and services over a certain period of time. If the inflation rates are higher than the interest rate offered by the Fixed Deposit, then the real rate of return (which is the interest rate - inflation rate) turns negative. In other words the deposit could possibly cause erosion of wealth for investors. Hence, there is some level of risk involved due to inflation.
Who should apply?
Eligibility criteria varies depending upon financial institutions offering fixed deposits. Eligibility criteria of most banks allow Indian residents, HUFs, companies, family trusts, associations, clubs, societies to apply for their fixed deposit schemes. For opening a fixed deposit account in a post office, an individual adult, a minor above the age of 10 years or a legal guardian on behalf of a minor or person of unsound mind are eligible to apply for the deposits. There are certain kinds of documents required while applying for fixed deposit.
Since fixed deposits involve low levels of risks, investors who are seeking a safe mode of investment can think about going for fixed deposits for investments. Also, Investors with certain demands regarding the tenure and returns may look at fixed deposit schemes as an option. Since many banks offer higher rates of interest for senior citizens, it becomes a suitable option for senior citizen investors to look into such offers to invest.
Latest Interest Rates
Currently due to COVID-19 pandemic, many financial institutions like banks have reduced the offered rates of interest for their fixed deposit schemes. There are different factors FD rates depend upon such as tenure of FDs, age of investor, etc.
The recent revision of rates of SBI has concluded some changes which are effective from 27th May, 2020. In their fixed deposit schemes of term range 7 days to 45 days will give 2.9% and terms of 46 days to 179 days will generate 3.9% and fixed deposits of around 180 days will give 4.4%. FDs of term ranging from 1 year to 3 years will deliver 5.1 % and those FDs of term ranging from 3 years to 5 years will offer 5.3% and for those of term ranging from 5 years to 10 years will offer 5.4%. Senior citizens may receive 3.4% to 6.2% on fixed deposits with terms ranging from 7 days to 10 days.
For ICICI bank on 4th June 2020, fixed deposits for terms ranging from 7 days to 14 days give 2.75% and for terms ranging from 1 year to 389 days give 5.15%. Customers who are senior citizens receive further 50 points of basis on all maturities.
For HDFC bank, interest rates were set effective from 12th June 2020, fixed deposits of term ranging from 7 days to 10 years may receive 2.75% to 5.5% on deposits. Customers who are senior citizens may receive 50 basis points higher rates of interest.
Taxation on Fixed Deposits and 80C benefits
As mentioned earlier, 5 Year Fixed Deposits can be claimed for tax deductions under Section 80C of Income Tax Act, 1961 for an amount up to Rs. 1,50,000 by investors. However, the interest income acquired from fixed deposits is taxable.
FDs other than the ones carrying a lock-in period of 5 years does not provide any tax benefits under 80C.
Fixed Deposits (FDs) Vs Debt Mutual Funds (MFs)
Since debt mutual funds can be redeemed at any moment, debt funds are considered to be more liquid than fixed deposits.
Investors would need to pay capital gains tax in the case of debt mutual funds according to their holding tenure. If MF units are redeemed before three years of investment, capital gains will be taxed as per the investor’s slab rate. And if MF units are redeemed after three years of investment, capital gains will be taxed at the rate 20% after indexation benefits.
While in the case of fixed deposits, interest income is taxable as per the slab rate applicable to the investor.
Fixed Deposits are considered to involve lower levels of risk as compared to debt mutual funds.
Fixed Deposits Vs. RBI Floating Rate Savings Bonds (FRSBs)
1. Interest Rate
While fixed deposits offer fixed rate of interest until maturity which was decided while logging into the scheme, FRSBs don’t have this feature. FRSBs offer a floating interest rate, so investors don’t have the option to lock-in interest rates until maturity.
2. Institutions offering the schemes
Investments in FRSBs can only be made through SBI branches, public sector banks and four private sector banks whereas fixed deposits are offered by different financial institutions such as banks, post offices, corporates, etc.
3. Eligibility Criteria
Individuals, HUFs are eligible to invest in FRSBs but NRIs are not able to invest in FRSBs. On the other hand, eligibility criteria of fixed deposits depends on the institutions offering FDs.
4. Tax Benefits
There is no tax benefit offered by FRSBs whereas fixed deposits carrying 5 years lock-in can be claimed for tax deductions under Section 80C of Income Tax Act, 1961 for an amount up to Rs. 1,50,000 by investors.
4. Loan Availability
Investors cannot avail loans against FRSBs in banks, Non-Banking Financial Company (NBFC), etc. whereas investors may avail loans against fixed deposits.