Priyanka Sambhav
COVID-19 pandemic has put our finances and earning in the eye of the storm. We are living in uncertain times, surrounded by more questions and fewer answers. In these times, instead of looking at new options of investment, we get pulled towards traditional investment mediums like fixed deposits. Reason being, a- the familiarity, b- the low-risk advantage and c- the assured return. So even when the return is low as compared to other investments and amidst falling bank interest rates, still FD appeals investors.
If you want to stick with bank FD here are few things to consider for earning a smart return-
1- Interest Rate
Do your homework on the interest rate. You will find FD interest on the website of all the banks but apart from big banks also go through many small scheduled banks who are offering 1-2% higher interest rates. Most of the public sector and private banks are giving an interest rate of around 5-6%, but when you look around, you will find many smaller banks with better interest rates. SBI’s one year FD is giving interest of 4.9% but if you look at on year FD of Indusind bank the interest is at 7%. But be careful while picking up your bank. Don’t go for unknown names and if you opt for a co-operative bank, do your due diligence.
2- Do not deposit more than Rs 5 lakh in a bank
The small scheduled banks with better interest rate will look better but they may not be as stable as well established private banks and PSU banks. So, while going for high-return do take care of the Rs 5 -lakh cap. The deposit insurance programme protects bank deposit of up to Rs 5 lakh if the bank collapses. The interest and principal both are covered under this insurance.
3- Choose shorter tenure
These are dynamic times and ever-changing, so if you lock your money for a longer tenure, it could be locked with the low-interest rate for a long time. If there will be a rise in the interest rate, you will miss the opportunity, or you may find some better return giving investment option. So do not lock-in for longer tenure but go for a short 1-year term and repeat it after a year.
4- Multiple smaller FD could be a better idea
Don’t put all your eggs in one basket- this holds for FD too. Instead of parking all your fund in a single large FD, you can divide it into multiple smaller FDs and can split it among separate banks/NBFCs. You can get better interest from multiple places, and in case of an emergency, if the need arises of premature withdrawal, you can break just one of the Fds and not forego the entire investment. This way, you will save on the early withdrawal penalty as well.
5- Evaluate tax liability
Interest earned on FD is fully taxable as per the tax slab of the investor as well as banks too deduct TDS. If interest from all FDs is less than Rs 40,000 in a year then banks cannot deduct any TDS but if interest income goes beyond Rs 40,000 then a 10% TDS is deducted. The limit is Rs 50,000 for senior citizens. However, for the FY 2020-21 (from 14 May till 31 March 2021) the TDS is deductible at 7.5%. Do evaluate the return vs tax math before you go for a bank FD.
