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Facts to learn about Fixed Deposits

Fixed Deposits are a popular investment choice in India. People, especially senior citizens, want to lock some amount in the deposits owing to their characteristic of being a safe option, guaranteeing assured returns. Investors rely on the monthly interest generated from the FDs as a main or additional income source. Despite the lower interest rates, people prefer investing in them.

Investors want a long-term investment, purely because they provide decent interest rates than short-term ones. Before you decide to open a Fixed Deposit, consider these facts:

Decide on interest payout mode

When you fill out the FD application form, you can receive interest payout either on a monthly or quarterly basis. The money gets credited to your account on a specific date mentioned on your FD receipt. The bank FD rates are competitive as well. Senior citizens get preference when it comes to interest rates. The other option here is a Cumulative FD, where you receive the entire sum along with the interest during FD maturity.

Reinvest the interests

Fixed Deposit returns and interest rates are two separate things. People can reinvest the interest paid on their FDs. This means that you need not make any withdrawal on the interest paid, which increases the principal amount. Suppose you go for quarterly interest payments but do not withdraw the interest. In such cases, your bank adds the interest to your principal amount and pays you interest on this compounded amount.

As you repeat the process, your return on interest becomes higher. This option is apt for people who do not depend on their FDs. So, it makes sense for them to opt for reinvestment of interest to earn higher returns.

Penalties and premature withdrawals

You may want to break your FD. This is because you need the money urgently, due to unforeseen circumstances or because another bank offers them at higher interest rates. If you break an FD, you need to pay some penalty. When you prematurely withdraw the FD, your bank lets you withdraw for an interest that is 0.5% lower than the actual applicable interest for the said tenure. Some banks also allow premature withdrawals on a pro-rata basis.

Interest earned is not tax-free

The FD interest rates earned get added to the income you earn each year. Hence, you get taxed according to the slab you fall into. This is for regular FD. The case is different for Tax-Saving FD as those fall under Section 80C and provide Rs. 1.5 lakh tax exemption. As for regular FDs, if you fall into this tax bracket through FD, you may be taxed according to tax slab percentage.