Bank Deposit

 

A bank deposit is also known as fixed or term deposit, which can be opened by account holders to earn better interest compared to the 4.0 per cent interest that the account balance earns in a savings bank account. This is a type of instrument in which a certain sum of money is placed with the bank for a specified time period at a fixed interest rate.

The interest rates offered by banks on such deposits depend on the number of days, weeks or months for which the deposit is maintained. There is great flexibility in the maturity period which ranges from 15 days to 10 years. The interest is higher in case of longer maturity periods and can be compounded quarterly, half-yearly or annually and varies across banks. The main draw for such deposits is the guaranteed higher interest that deposits earn.

Investment Objective and Risks
The prime objective of the bank deposit is to earn better interest on savings compared to what an ordinary savings bank offers. Such deposits are preferred by risk-averse investors, who find the guaranteed fixed returns extremely reassuring to invest in.

Capital Protection
The capital in a bank deposit is not fully protected. Till recently, all bank deposits were insured under the Deposit Insurance and Credit Guarantee Scheme of India, which now has been made optional exposing the deposits to risks if the bank is not insuring deposits.

Inflation Protection
The deposit is not inflation protected, which means whenever inflation is above the deposit interest rate; the deposit earns no real returns. However, when the interest rate is higher than inflation rate, it does manage a positive real rate of return.

Guarantees
The interest rate is fixed and guaranteed for the duration of the deposit at the commencement of the deposit.

Liquidity
The bank deposit is liquid, despite the lock-in during the tenure of the deposit. The liquidity is offered in the form of loans and withdrawals subject to conditions.

• Loan on the deposit up to 75-90 per cent of the deposit amount is available from banks against the fixed deposit receipts. Though the interest charged on the loan will be marginally higher than the interest earned by the deposit.
• The deposit can be closed prematurely at the cost of losing the interest it earns.

Credit Rating
Bank deposits do not carry any credit rating.

Exit Option
Early closure of a deposit is permitted with a penalty.

Other risks
• Interest rate changes pose risks to existing deposit holders; for instance, you may have locked-in at a lower interest rate but due to economic factors; the bank starts to offer a higher rate on deposits later.
• If the bank where you have the deposit does not have deposit insurance and credit guarantee, you run the risk of losing the capital and the interest.

Tax Implications
The amount invested in deposits with a maturity period of 5 years in a scheduled bank is eligible for tax deduction under section 80C. However, the interest earned on the deposit is taxable.

Various Types of Bank Fixed Deposits
Fixed deposit
• In this type of deposit both the tenure and the interest rate for the tenure is fixed.
• Recurring deposit
• In this type of deposit, bank account holders deposit equal amount of money every month.
• The interest rate is fixed for the deposit tenure and so is the number of monthly instalments.

 

Security deposit
A few corporate organisations stipulate new employees to provide security deposit to check attrition.
• This deposit is made by an employee and he cannot withdraw such fixed deposits without the consent of the employer.
• The company has the right to the FD in the event of employee leaving the organisation before a certain stipulated period.

Tax-saver fixed deposit
• Deposits with 5-year lock-in offer tax benefits under Section 80C.

Where to Open a Deposit
You can open a deposit at any nationalised, private sector or foreign bank.

How to Open a Deposit
• Select the bank branch to open the deposit.
• Choose a nominee and get a witness signature.
• Your existing bank account counts as being KYC compliant.

How to Operate a Deposit
• You can issue a cheque to the bank through your existing savings bank account to start a deposit.
• A deposit receipt or certificate is issued detailing the deposits features.

Types of Transactions
• Cheque
• Money transfer
• Electronic clearing service (ECS)

Points to Ponder
• Minimum sum to start a deposit
• Penal provisions in case of partial or early foreclosure

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