Fixed deposit

A fixed deposit (FD) is a financial instrument provided by Indian banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date . It may or may not require the creation of a separate account. It is known as a Term Deposit in the Canada, Australia, New Zealand and the US and as Bond in United Kingdom they are considered to be very safe investments. Term Deposits in India is used to denote a larger class of investments with varying levels of liquidity. The defining criteria for a Fixed Deposit is that the money cannot be withdrawn for the FD as against Recurring deposit or Demand deposit before maturity. Some banks may offer additional services to FD holders such as loans against FD certificates at competent interest rates. Its important to note that banks may offer lesser interest rates under uncertain economic conditions. The interest rate varies between 4 and 11 percent. The tenure of an FD can vary from 10, 15 or 45 days to 1.5 years and can be as high as 10 years. These investments are safer than Post Office Schemes as they are covered under Deposit Insurance & Credit Guarantee Scheme of India. They also offer Income tax and Wealth tax benefits. Fixed deposits are a high-interest-yielding Term deposit offered by banks in India. The most popular form of Term deposits are Fixed Deposits, while other forms of term Deposits are Recurring Deposit and Flexi Fixed Deposits (the latter is actually a combination of Demand deposit and Fixed deposit). To compensate for the low liquidity, FDs offer higher rates of interest than saving accounts. The longest permissible term for FDs is 10 years. Generally, the longer the term of deposit, higher is the rate of interest but a bank may offer lower rate of interest for a longer period if it expects interest rates, at which RBI lends to banks ("repo rates"), will dip in the future. Usually in India the interest on FDs is paid every three months from the date of the deposit. (e.g. if FD a/c was opened on 15th Feb., first interest instalment would be paid on 15 May). The interest is credited to the customers' Savings bank account or sent to them by cheque. This is a Simple FD. The customer may choose to have the interest reinvested in the FD account. In this case, the deposit is called the Cumulative FD or compound interest FD. For such deposits, the interest is paid with the invested amount on maturity of the deposit at the end of the term. Although banks can refuse to repay FDs before the expiry of the deposit, they generally don't. This is known as a premature withdrawal. In such cases, interest is paid at the rate applicable at the time of withdrawal. For example, a deposit is made for 5 years at 8%, but is withdrawn after 2 years. If the rate applicable on the date of deposit for 2 years is 5 per cent, the interest will be paid at 5 per cent. Banks can charge a penalty for premature withdrawal. Banks issue a separate receipt for every FD because each deposit is treated as a distinct contract. This receipt is known as the Fixed Deposit Receipt (FDR), that has to be surrendered to the bank at the time of renewal or encashment. Many banks offer the facility of automatic renewal of FDs where the customers do give new instructions for the matured deposit. On the date of maturity, such deposits are renewed for a similar term as that of the original deposit at the rate prevailing on the date of renewal. Income tax regulations require that FD maturity proceeds exceeding Rs 20,000 not to be paid in cash. Repayment of such and larger deposits has to be either by " A/c payee " crossed cheque in the name of the customer or by credit to the saving bank a/c or current a/c of the customer. Some Benefits of FD: Customers can avail loans against FDs up to 80 to 90 per cent of the value of deposits. The rate of interest on the loan could be 1 to 2 per cent over the rate offered on the deposit. Non resident Indian's and Person of Indian Origin can also open these accounts. Taxability: Tax is deducted by the banks on FDs if interest paid to a customer at any branch exceeds Rs 10,000 in a financial year. This is applicable to both interest payable or reinvested per customer or per branch. This is called Tax deducted at Source and is presently fixed at 10% of the interest. Banks issue Form 16 A every quarter to the customer, as a receipt for Tax Deducted at Source. If one feels that the total income for the year will not fall within overall taxable limits, then he can submit Form 15 G, in case he is below 65 years of age, or Form 15 H, in case he is above 65 years of age. How bank FD rates of interest vary with RBI policy: In certain macroeconomic conditions (particularly during periods of high inflation) RBI adopts a tight monetary policy, that is, it hikes the interest rates at which it lends to banks ("repo rates"). Under such conditions, banks also hike both their lending (i.e. loan) as well as deposit (FD) rates. Under such conditions of high FD rates, FDs become an attractive investment avenue as they offer good returns and are almost completely secure with no risk.

Recurring deposit

Recurring Deposits are a special kind of Term Deposits offered by banks in India which help people with regular incomes to deposit a fixed amount every month into their Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits[1]. It is similar to making FDs of a certain amount in monthly installments, for example Rs 1000 every month. This deposit matures on a specific date in the future along with all the deposits made every month. Thus, Recurring Deposit schemes allow customers with an opportunity to build up their savings through regular monthly deposits of fixed sum over a fixed period of time. The Recurring Deposit can be funded by Standing instructions which are the instructions by the customer to the bank to withdraw a certain sum of money from his Savings/ Current account and credit to the Recurring Deposit every month. When the RD account is opened, the maturity value is indicated to the customer assuming that the monthly instalments will be paid regularly on due dates. If any instalment is delayed, the interest payable in the account will be reduced and will not be sufficient to reach the maturity value. Therefore, the difference in interest will be deducted from the maturity value as a penalty. The rate of penalty will be fixed upfront. To calculate the maturity value of a reoccurring deposit account, there is a formula used by banks. Tax Deducted At Source ( TDS ) is not applicable on RDs. The customer can avail loans against the collateral of Recurring deposit up to 80 to 90% of the deposit value. Rate of Interest offered is similar to that in Fixed Deposits. At present it seems to be one of the best method to save the amount yield after years of deposit because TDS is not applicable on RDs.

Way2Goals - Home

Way2Goals - Home

Now, get more on small savings ; Indian Postal Schemes

The finance ministry has notified that from December 1 the rate of interest on Public Provident Fund (PPF) scheme in the current financial year ending March 2012 would be 8.6%, up from 8%. The government has also allowed higher limit in PPF investments, allowing one to put up to Rs 1 lakh per year in this instrument, from Rs 70,000 earlier.

The rate of interest on the 5-year national savings certificate (NSC) has also been hiked from 8% to 8.4% now, while small savings accounts holders in post offices will now get 4% interest, up from 3.5%. Interest on monthly investment schemes (MIS) has also been increased to 8.2% from 8%, and on national savings certificates (NSC) the hike has been to 8.4% from 8%. A new 10-year NSC will also be available soon.

There are some disappointments as well. The government is withdrawing Kisan Vikas Patra, on suspicion that this is being used for money laundering. It has also decided to do away with the 5% bonus that MIS customers got at the time of maturity. What is even more disappointing is that this withdrawal of bonus payout will be applicable even on old accounts that remain operational on or after December 1.
There is another important change that investors need to be mindful about. Earlier interest rates in all small savings schemes were fixed for the tenure of the investment. This is changing now: From December 1, the rates of interest on these instruments will be linked to what one can earn in the government bonds, also called Gilts, of equivalent maturity. What this means is returns from these much safer savings instruments will become market-linked and hence variable. On some year it will go up, while on some it will go down.

This variable rate also means that if you have invested in an NSC of 5 years, you rate of interest will be 25 basis points above the yield on 5-year Gilts. For example, if the yield on 5-year Gilts is 8.75%, you will get 9% on your investments. And as the corresponding yield changes, the rate of interest on your investment will also change each year. The good news for senior citizens is that the rate of interest they will get on the 5-year Savings Scheme for them will fetch 100 basis points more than the yield on 5-year Gilts. So in the above example, they will earn at the rate of 9.75%. And in 10-year NSC, one will get 50 basis points above the 10-year yield on Gilts.

Experts say that under the changed rate structure, PPFs will now give one an annual post-tax return of about 11.3% (provided full income tax benefits are availed by the investor), which is very good. And on top of this, remember, this is a very safe investment.

SOURCE: TIMES OF INDIA