Company Fixed Deposits

 

WHAT IS FIXED DEPOSIT (FD)?

FIXED DEPOSIT  is one of the most popular forms of debt investment as it carries minimal risk of principal loss, interest rate fluctuations and payment default.

If someone has surplus funds and wants to park it somewhere where they can earn guaranteed returns irrespective of market fluctuations and wants to earn more than their regular savings account, then FIXED DEPOSIT (FD) is one of the best options. At the time of investing itself, you will know the exact amount you will receive on maturity. FDs can be divided into 3 categories.

1. Banks Fixed Deposits – A deposit made with a bank is called Bank FIXED DEPOSIT. Banks are regulated by “Reserve Bank of India” hence it carries a comparatively lower risk of default. However, one should be very careful while selecting banks as they can also default in case of extreme situations.

 

2. Corporate Fixed Deposits  - If someone wants to earn higher returns than what banks offer then they can invest directly with companies or corporates.

Though companies offering deposits are governed by proper guidelines under section 58A of the companies act, they comparatively carries a higher risk of default as compared to bank FDs. However, they compensate for the higher risk with higher returns. It is always advisable to check the credit rating of the company before investing in it.

 

3. Tax Saving Fixed Deposits – Deposits made under this category is eligible for deduction under section 80C up to 1,50,000/- per annum. A tax-saving fixed deposit can be done only in banks. Also, it has a lock-in for 5 years.

 

 

IMPORTANT POINTS TO NOTE ABOUT FIXED DEPOSIT (FD)

The following are some of the important features of a FIXED DEPOSIT (FD) that every investor must know.

1. Investor’s profile – It is best suited to investors who want to lock-in funds for a specific tenure at a fixed rate with negligible risk. It is not suitable for long term investing beyond 5 years since its returns are restricted.

 

2. Risk – FIXED DEPOSIT (FD) is considered to be one of the safest investments and involves minimum risk of default and interest rate fluctuations. However, the risk is not ruled out completely. If a bank runs into losses, your principal investment is at a risk of getting wiped out. However, if the bank goes into dissolution, then Rs. 5,00,000/- per account is insured by “Deposit Insurance and Credit Guarantee Corporation”.

 

3. Liquidity – FIXED DEPOSIT (FD) can be broken prematurely. However, accessing funds before maturity may result in a penalty.

 

4. Taxation – Interest earned from this scheme is fixed and is treated as “Income from other sources”. Hence, investment proceeds received on maturity is added to total income and taxed as per the applicable slab.  Also, the amount invested in bank FD with 5 years lock-in is eligible for tax benefit under section 80C.

 

5. Volatile – FIXED DEPOSIT (FD) involves zero risk of market volatility since the interest rate it offers is predetermined and fixed until maturity irrespective of market fluctuations.

 

6. Time horizon – FIXED DEPOSIT (FD) offers great flexibility to its investors as it offers maturity ranging from 15 days to 5 years.

 

7. Regular Income – FIXED DEPOSIT (FD) is known for generating guaranteed returns for its investors in the form of regular interest payout on a quarterly, semi-annual and annual basis.

 

8. Returns – FIXED DEPOSIT (FD) offers fixed interest in the range of 4% to 9% per annum depending on the tenure opted.

 

9. Asset class – FIXED DEPOSIT (FD) is a pure debt product.

 

10. Cost – FIXED DEPOSIT (FD) does not involve any cost of investment except penalties for breaking it prematurely.

 

11. Loan facility – In case of emergencies, investors can avail loan against FD up to 90% of the deposit value to avoid loss of interest and save the pre-closure penalty. This facility is available up to the remaining tenure of your FD on a renewable basis.

The applicable rate is up to 2% higher than the rate of FD. However, one must verify other conditions as well like the prepayment penalty in case of early closure of the loan, processing charges, availability of OD facility without extra charges etc.

 

 

WHO CAN AND CANNOT INVEST IN FIXED DEPOSIT (FD)?

Any individual including NRI (having NRE and NRO account), firms, Trusts, Association of Persons, Hindu Undivided Family, companies can invest in FIXED DEPOSITs (FD).

 

 

MINIMUM AND MAXIMUM INVESTMENT ALLOWED IN FIXED DEPOSIT  (FD)

The FIXED DEPOSIT (FD)  or recurring deposit account can be opened with as low as Rs. 500/-. However, there is no maximum limit to this.

 

 

WHERE DOES FIXED DEPOSIT (FD) INVEST YOUR MONEY?

When you open a FIXED DEPOSIT (FD)  with the bank or a company, you are lending money to them which they use for fulfilling their working capital requirements or giving loans and advances to other customers and earn interest out of it. Out of the total interest earned, they share a portion of interest with you.

So when you avail of a Home Loan, Loan Against Property, Personal Loan, Education Loan or any other type of loan from a bank then you are using someone else’s money who has booked a deposit with that particular bank.

 

 

WHAT KIND OF RETURNS CAN FIXED DEPOSIT (FD) GENERATE?

FIXED DEPOSIT  (FD) offers a wide range of tenure ranging from 7 days to 10 years depending on every individual’s liquidity requirements. Some banks also offer tenure of more than 10 years. The returns are usually in the range of 4% to 9%.

Rates being offered on FIXED DEPOSITs (FD) vary across tenure. it is compounded quarterly and is paid out either monthly, quarterly, half-yearly, yearly or on maturity. The rates for senior citizens are usually 0.25% - 0.50% higher than regular rates.

Banks usually offer their best rate if you book a deposit for 365 days as it keeps them protected from long term interest rate fluctuations and helps them to meet their day to day business requirements as well. For other tenures, the rates are usually lower. Lower the tenure, lower will be the rate.

Assuming, you invest Rs. 10,000/- per month until retirement (60 years) @ average rate of 6% per annum, the corpus you will create (approximately) on your retirement i.e. at the age of 60 at various age groups will be as follows:

Investment start age	Corpus on retirement
20 Years	₹ 1,91,69,635/-
25 Years	₹ 1,38,02,901/-
30 Years	₹ 97,92,565/-
35 Years	₹ 67,95,808/-
40 Years	₹ 45,56,458/-
45 Years	₹ 28,83,085/-
50 Years	₹ 16,32,643/-

 

 

FUND ACCESSIBILITY AND LOCK-IN APPLICABLE FOR FIXED DEPOSIT (FD)

Funds under FIXED DEPOSIT (FD) are easily accessible except tax-saving FD which has a lock-in of 5 years. It also offers a wide range of tenure ranging from 7 days to 10 years depending on every individual’s liquidity requirements. So you have to stay invested until the deposit matures.

In case of emergencies, FIXED DEPOSITs (FDs) can be broken prematurely however that will attract a penalty of 1% on the applicable interest rate for the tenure in which the deposit was broken. E.g. If you have booked a deposit for 6 months @ 5% and you break it prematurely in 3 months then the bank will pay you interest applicable for 3 months less 1%.

Some banks nowadays waive off such penalties to lure customers.

In case, you are in urgent need of money but don’t want to break a FIXED DEPOSIT prematurely then you can also apply for a loan against FD. The applicable rate on loan will be around 2% higher than the applicable rate on deposit. However, the benefit is, your investment will remain intact and you will not have to give away 1% towards the penalty.

 

 

WHAT ARE THE BENEFITS OF INVESTING IN FIXED DEPOSIT (FD)?

A FIXED DEPOSIT (FD) offers the following benefits to its investors.

1. Safety – FIXED DEPOSIT (FD) is the safest option with guaranteed returns and carries a minimum risk of principal loss.

 

2. Flexibility – FIXED DEPOSIT (FD) also provides flexibility where you can select tenure ranging from 7 days to 10 years or more depending on your current and future liquidity needs.

 

3. Easy access to funds during hard times – FIXED DEPOSIT (FD) is highly liquid where in case of financial hardships, you can either prematurely break it and access funds or take a loan against FD.

 

4. Creates cash flow – You can opt for a monthly or quarterly interest payout option and create a cash flow.

 

5. Save Tax – Tax saving FD will not only help you accumulate wealth for long term goals but also help you save tax under section 80C.

 

6. Protection from market volatility – Since FD is a debt instrument, it provides a fixed return on investment that keeps you protected from market volatility.

 

 

WHAT ARE THE LIMITATIONS OF INVESTING IN FIXED DEPOSIT (FD)?

A FIXED DEPOSIT (FD) has the following limitations.

1. Tax inefficient – It is one of the most tax-inefficient forms of investments as the entire income earned is added to the total income and taxed according to the applicable tax slab.

 

2. Returns low enough to beat inflation – FIXED DEPOSIT (FD) offers lower returns as compared to other fixed-income instruments like NCD, liquid/debt funds, FMP, etc. Returns generated are not even good enough to beat inflation.

 

3. No equity participation – Since FIXED DEPOSIT (FD) offers a fixed return on investment, its participation in equity is zero. This may keep you deprived of the opportunity to earn more when the market is flourishing.

 

4. Not 100% safe – Though FIXED DEPOSITs (FD) offer a comparatively higher level of safety as compared to equity funds and other debt instruments, it is not 100% safe as it is exposed to credit risk. If the bank or the company you have invested your money in run into losses, they can not only default on the payment of interest but also the principal.

 

 

WHO SHOULD CONSIDER INVESTING IN FIXED DEPOSIT (FD)?

A FIXED DEPOSIT  (FD) is most suited to the following investors:

1. Conservative Investor - It is best suited to individuals having surplus funds, who want to park it somewhere where they can earn guaranteed returns irrespective of market fluctuations and wants to earn more than what they get in a savings account.

 

2. Senior Citizens - Individuals above 60 years of age who are not willing to take any risk of market fluctuations. Senior citizens also get a higher rate of interest in FIXED DEPOSIT (FD).

 

3. Investors who want guaranteed returns - Any investor who wants to park funds temporarily for the short term and want to earn fixed interest can invest in FIXED DEPOSIT (FD).

 

4. Investors with high liquidity requirements – Investors who prefer to keep a high balance in their savings bank account can park those funds in FD. The money will not be as liquid as a savings account however, in case of emergencies, it can be withdrawn prematurely with a penalty on interest.

 

 

WHO SHOULD AVOID INVESTING IN FIXED DEPOSIT (FD)?

A FIXED DEPOSIT (FD) may not be the best investment for the following investors:

1. Risk-takers - Young investors especially below 35 years of age with a high-risk appetite can earn much better returns in equity mutual funds or direct equities.

 

2. Investors in higher tax slab - Investors who fall under a higher tax slab of 20% or more as the entire interest earned is added to their taxable income and taxed accordingly.

 

 

A PIECE OF ADVICE

THINGS YOU SHOULD DO WHILE INVESTING IN FIXED DEPOSIT (FD)

FIXED DEPOSIT (FD) investors must follow the below suggestions while investing to maximize the value of their investment.

1. Conduct due diligence – Never invest in any corporate deposit or private banks before verifying their credentials and checking their credit rating. Usually, companies with low ratings try to lure investors with attractive rates. But don’t fall in such traps as they are very risky and involves the risk of getting your entire principal investment wiped out. PSUs and nationalized banks offer lower rates but they are comparatively safer.

 

2. Book multiple deposits – Breaking FIXED DEPOSIT (FD) prematurely attracts penalty. Hence, booking multiple FDs can help investors minimize their loss in case one of the FDs needs to be broken due to an emergency. In such cases, other FDs need not be broken prematurely and will continue to earn regular interest.

 

3. Know what you are agreeing to – Rates should be verified at the time of opening a FIXED DEPOSIT (FD) account and one must seek clarification whether rates being offered are cumulative or non-cumulative. Investors sometimes get deceived by this term and misunderstand cumulative rates with a higher rate of interest.

 

4. Spread out your investment across various banks – Funds parked in the bank account and FIXED DEPOSIT (FD) account is not 100% safe. In the event where your bank runs into losses and goes into liquidation, all your money lying in that particular bank can be lost permanently.

In such cases, you would be able to recover up to Rs. 5,00,000/- since every bank account is insured under “” up to that limit. Hence, spreading out your investment across different banks can help you mitigate such risks.

 

5. Submission of TDS form on time – Submit form 15G or 15H as applicable in April every year in case your income is non-taxable during that year to avoid TDS deduction.

 

6. Opt for cumulative option – Always plan your investment and future liquidity needs. If you do not foresee any expenses, always opt for a cumulative option. With this, the interest earned will be reinvested and your money will grow at a faster pace.

 

7. Update nomination details – Updating nominee details with the respective bank or company is very important. In case of an investor’s death, the family members should not end up running from pillar to post when they need that money the most to claim your investment proceeds.

 

 

THINGS YOU SHOULD AVOID DOING WHILE INVESTING IN FIXED DEPOSIT (FD)

FIXED DEPOSIT (FD) investors must avoid indulging in following practices while investing to protect their investment from losing its value.

1. Breaking it prematurely – Avoid breaking the deposit prematurely as it may lead to a penalty of 1%. Instead, take a loan against FD.

 

2. Getting carried away with attractive returns – Higher returns also involves higher risk. Never invest in any scheme before verifying their credit rating and market reputation. Usually, some banks and institutions take very high exposure to companies with very low ratings and lure investors with attractive returns. But don’t fall in the trap without verifying details as they are very risky.

 

3. Do not get influenced by anyone but financial experts – A confused investor always has a tendency of reaching out to their friends and relatives for suggestions while making critical investment decisions. That happens irrespective of the knowledge and the level of understanding the friend has about the domain. It is as good as asking a truck driver, how to fly an airplane. Such advices in most cases are based on their individual experiences and hardly on calculations or facts and figures. Hence, instead of blindly following the financial advice of a random friend, investors must act wisely and take assistance of a well qualified financial planner who has sound knowledge about the domain.

 

 

WHAT ARE THE RISKS INVOLVED IN FIXED DEPOSIT (FD)?

A FIXED DEPOSIT (FD) investors should be mindful of following risks involved in this investment:

1. Inflation risk – Though FIXED DEPOSIT (FD) ensures safety of the principal and gives assured returns, it is still not good enough to beat inflation year on year. The average rate of inflation is around 6% - 8% per annum whereas post-tax returns generated from FD is less than 5% - 7% or even lesser. This may lead to shortfall when you look at the corpus you created in meeting your financial goals.

To reduce the risk, start investing partially in equity mutual funds through SIP. Especially, if you are less than 35 years old and have many financial goals to achieve in the future.

 

2. Credit risk – It is a common misconception that all your money deposited in your bank account is 100% safe and secured. But what happens to your deposits if the bank goes bankrupt?

In such a scenario, you are entitled to receive only up to Rs. 5,00,000/- as per the budget announced for the financial year 2020-21 out of all the balance you have with the bank and remaining balance will be lost. All thanks to the RBI initiative who introduced “Deposit Insurance and Credit Guarantee Corporation” (DICGC) in the banking system. “DICGC” is an insurance that protects your bank deposits up to Rs. 5,00,000/- per bank account. Every account is covered in this scheme by default the moment the bank account is opened.

To mitigate the risk, split all your deposits in multiples of 5,00,000/- across different banks. E.g. If you want to deposit Rs. 25,00,000/-, then split them into multiples of Rs. 5,00,000/- each across 5 different banks. This will keep your principal-protected and safe at all times.

 

 

HOW TO SELECT THE BEST FIXED DEPOSIT (FD)?

FIXED DEPOSIT (FD) investors must follow the below instructions before signing up for the product to ensure the safety and growth of their investment.

1. Interest Rate – Always compare the rate of interest of various banks. The bank offering a higher rate of interest should be shortlisted.

 

2. Credibility – Though rates are important, that should not be the only deciding factor. The credibility of the bank or the company matters the most. Some low rated bank or companies may offer you a better rate of returns but it is not worth since it involves a higher risk as well including the risk of principal loss.

 

3. Always prefer public sector banks – Unless there is a major difference in the offer, always prefer government entities over the private ones. This will only keep your money more secure in the long term.

 

4. Liquidity requirements – If you are looking for regular income on a monthly or quarterly basis then you can opt for a non-cumulative option otherwise opt for a cumulative option for wealth accumulation in the long run.

 

5. Bank or company FD – What is your preference? Higher safety or better returns? A bank FD is safer but will pay you moderately. On the other hand, if you can study the ratings and credentials of the company then you can opt for corporate deposits to earn better returns as compared to bank deposits.

 

6. Other Facilities – Check how favorable other facilities are for the customers like loans against FD, etc. Many banks offer loans up to 90% of the total deposit amount at a lower rate. Some also offer an overdraft facility on FD where you can access funds in the least possible time.

 

 

TAXATION RULES FOR FIXED DEPOSIT  (FD)

FIXED DEPOSIT (FD) is one of the most tax-inefficient investments as the entire interest earned is added to your total taxable income and taxed according to the applicable slab.

Also, if your total interest payout for that year exceeds 10,000/- with a particular bank (across all branches) then TDS will be applicable. The TDS rate will however differ based on the following categories.

Resident Individuals, Sole Proprietorship, Trusts, Association of Persons, HUF where pan card is updated.	10%
Resident Individuals, Sole Proprietorship, Trusts, Association of Persons, HUF where pan card is NOT updated.	20%
Domestic Companies	20.4%
NRO Deposits	30.6%

 

In the case of joint FIXED DEPOSIT (FD) holders, it is the first account holder against whose PAN, TDS is deducted. The tax liability is calculated on the first applicant's name only. The interest on deposits in joint names is paid to the first depositor.

The bank issues “Form 16A” at the end of every financial year as proof of TDS deduction which you need to report in your tax returns of that year. “Form 16A” highlights the total amount of TDS paid by you to that particular bank on interest earned on all FIXED DEPOSITs and savings bank account. In case, your income is not taxable for that year, you can claim a refund of entire TDS paid. On the contrary, in case you fall under the higher tax slab, then you will have to pay extra tax.

The TDS then has to be deposited into your income tax account every quarter. Form 26AS is where you can cross verify all your tax credits from your employer or any other entity who deducts TDS from your income.

In the case of a minor, the total interest earned will be clubbed with the parent with higher income and taxed accordingly.

In any given year, if you feel that your total taxable income will not exceed the minimum tax slab, then you can give instructions to the bank for not deducting TDS on your interest income.

To do this, you need to fill form 15G in case you are below 60 years of age or from 15H in case you are a senior citizen before the end of April every year.

 

 

DOES ANY OTHER PRODUCT OFFER BETTER PROSPECTS THAN FIXED DEPOSIT (FD)?

A FIXED DEPOSIT (FD) can be beaten by the following products on various grounds.

1. From a safety point of view – Bank FD is considered to be safer than most debt-oriented instruments as the returns it generates are fixed. However, some of the banks or companies offering FD involves a higher level of risk as they lend money to businesses with low credit ratings to earn better returns.

Hence, investors should be mindful of such risks involved and check the track record and portfolio composition of the bank or companies they are investing money in.

Also, to ensure higher safety of your investment, it is best to spread out your investment across different banks.

 

2. From the returns point of view – Balanced mutual funds generate much better returns than FIXED DEPOSITs as they also participate in the equity market.

Equity mutual funds, on the other hand, generate even better returns in the long run however it carries higher risk as well, as they invest directly in the stocks of various companies.

If someone has an even higher risk appetite is looking for even better returns then they can invest in stocks or IPOs of various companies.

 

3. From a liquidity point of view – FIXED DEPOSITs (FD) come with a pre-defined maturity period and breaking it prematurely attracts penalty. Hence, someone who is expecting any major expense soon can consider investing in liquid funds or ultra short term funds which not only generates better post-tax returns but also offer higher liquidity.

 

 

HOW TO INVEST AND DOCUMENTS NEEDED

To Invest in “FIXED DEPOSIT ”, you can walk into the branch of any bank and follow below instructions –

• Fill the application form.
• Review the interest rates and range of tenures being offered.
• Submit the application form along with a crossed cheque favoring “Yourself” and the amount of which you want to book an FD.
• Collect FD receipt specifying the amount invested, the interest rate offered and the maturity amount.

Please note you can also open an FD account online.

 

 

IMPORTANT TERMINOLOGIES

• Cumulative and non-cumulative FIXED DEPOSIT
• Maturity Date
• Maturity Amount
• TDS
• Recurring Deposit