Most banks are offering rates of interest around 6.5 per cent and after deduction of tax and adjusting for inflation, the effective return is almost negative.
Bank fixed deposits remain a popular savings option for most conservative investors. Those who do not wish to take risk and want a fixed return on their investments, keep their funds in bank deposits. Banks offer deposits across different tenure and hence depending on the time horizon, depositors can choose to open an FD account from 15 days to as long as 10 years.
Read More: GST rules changing from April 1, to impact lakhs of companies in India
A few things to keep note of before putting your money in a bank FD:
1. Why and how to do Laddering in FDs
If you are going to open a fixed deposit in a bank in a few days, here’s an important message for you. Some banks have already started revising their FD rates upwards. In an inflationary environment, interest rates in the economy tend to go up and more banks are expected to offer higher rates on their FDs in a few months’ time. So, either you can spread your funds through ‘laddering’ approach or put maximum in short to medium term deposits. Under ‘laddering’, when the shortest tenure FD matures, reinvest again for the longest tenure based on your need.
2. Lower effective returns
If you are in the highest tax bracket paying 30 per cent income tax, the post tax returns in bank FD will be very low for you. The interest earned on bank FD is subject to tax as per one’s income tax slab. The amount of interest income gets added to the ‘Income from other sources’ and then taxed. Most banks are offering rates of interest around 6.5 per cent and after deduction of tax and after adjusting for inflation, the effective return is almost negative. FD is best for preservation of capital and not for wealth creation.
3. Special deposits
At times, banks have a special deposit scheme for specific tenure of say 444 days or 650 days or 888 days as well. On such deposits, banks typically offer a higher rate of interest. Opting for them gives you a higher rate by locking in funds for a few extra days.
4. Sweep-in FD
FD comes with a lock-in period and at the time of need, you will have to prematurely break the deposit to access cash. Instead, choose to go with sweep-in FD schemes in banks where liquidity is maintained as well you can continue to enjoy FD rates.
Read More: Income Tax return: How to e-verify via different methods, check here
5. Explore FD of Small Finance Banks
In addition to leading banks, there are FD schemes of Small Finance Banks which generally offer a higher rate of interest. Small Finance Banks like other commercial banks enjoy insurance coverage of deposits up to Rs 5 lakh per depositor per bank.
