5 Lesser Known Facets Of Bank FDs That Can Help You Make The Most Of Your Investments

It's not been just years or decades, but in fact, generations have passed since the popularity of bank fixed deposits began to grip investors in India. Whether it's been our grandparents, parents, relatives or friends, FDs have been one of the first ports of call to deposit money for most of them, right?

However, despite the popularity of this ¡®simple and safe¡¯ investment avenue, many investors fail to unlock the full potential of bank FDs. Curious to know how? Read on as we discuss some lesser-known facets of an FD and how you, the investor, can make the most of it.

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1. Spread FDs across different banks to boost insurance cover

Did you know that DICGC (Deposit Insurance and Credit Guarantee Corporation), a subsidiary of RBI, offers deposit insurance cover for deposits opened with scheduled banks? As per the insurance program, cumulative bank deposits, which include fixed deposits, savings accounts, recurring deposits and current accounts, are insured up to Rs 5,00,000 per bank per depositor in the event of bank failures. Here, both the interest as well as the principal component is insured under DICGC cover.

Now, as the Rs 5,00,000 cover per bank per depositor applies separately to the deposits held in each bank, you can distribute your FD investments across multiple banks in such a manner that their cumulative deposits with each bank do not exceed the Rs 5,00,000 mark. This will ensure all your deposits in different banks remain covered under the insurance.

2. Factor in your income tax slab to calculate post-tax FD returns

Not many FD investors are aware that their tax liability does not end merely with the TDS deduction done by banks. Even the interest income on your bank FD is taxable as per the tax slab you fall into. The only exception that stands here is the tax deduction of up to Rs. 50,000 available to senior citizens under Section 80TTB of the Income tax act.

Also, remember that the difference between the actual tax liability and TDS amount deducted gets adjusted at the time of filing income tax returns (ITR). That is why it's wise for depositors to factor in their income tax slab while calculating post-tax returns from their bank FDs. More often than not, the post-tax returns of bank FDs, especially those of public sector banks, fail to beat inflation. In that case, it's wiser to go for better investment avenues giving higher returns, such as mutual funds.

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Also Read: Are Small Finance Banks Safe?

3. Understand the 'effective interest rate' before breaking the FD

Most of us must be aware that when required, bank FDs can be liquidated by breaking them. But did you know that making such a premature withdrawal from your FD, whether partially or fully, attracts a penalty? Most banks tend to penalize premature withdrawals of FDs by levying a penalty of usually around 1% on the effective interest rate. For the uninitiated, effective interest rate refers to the lower of the original booked FD rate or the FD card rate applicable at the time of opening the FD for the corresponding period for which the FD remained in effect. To make it more clear, let's take an example.

Let's assume that you had opened an FD amounting to Rs 50,000 at a booked rate of 6% p.a. for three years (compounded quarterly), and the bank levies 1% penalty on premature withdrawals. In case you withdrew the FD money on completion of say, 1 year, the bank would deduct 1% rate either from your card rate on the date of deposit, corresponding to the one year effective period of deposit (assuming the rate as 5% p.a.), or the contracted FD rate for the entire original three-year tenure (6% p.a.), whichever is lower.

Implying, in this case, your FD closure amount would be Rs 52,547 (5% p.a.), instead of Rs 59,781 which you would have accumulated at 6% p.a. in case of completion of FD¡¯s booked tenure of three years.

4. Do not assume that interest income on tax-saving FD is tax-free

Tax-saving bank FDs are one of the many tax-saving options falling under the umbrella of Section 80C. Just like other tax saving options in this section, such as insurance premiums and principal components of home loans, ban tax saver FDs too offer tax savings of up to Rs 1.5 lakh per financial year.

However, not only do these tax-saving fixed deposits come with a lock-in period of five years, but even the interest earned gets taxed according to your income tax slab, which reduces your post-tax returns. You can instead go for tax saving mutual funds, i.e. ELSS (equity linked savings scheme) to achieve twin objectives of tax saving and wealth creation. Click here to know more.

5. Your FD can help your credit score too

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Many of you must be thinking about how FDs are connected to credit scores, right? After all, credit score takes into consideration your activities related to credit facilities like credit cards and loans, isn't it?

Well, this is where secured credit cards come into the picture!

FD investors who want to build or improve their credit score can leverage their FD to avail secured credit cards. Simply put, secured credit cards are offered against FDs put as collateral. Banks provide you with a credit limit on your secured credit card depending on your FD¡¯s value. These are just like regular credit cards in most aspects, and you even continue to earn interest on the FD put as collateral. Sounds great, isn't it?

While you keep using your secured credit card for transactions and pay your bills timely and in full, your credit score keeps building up and/or improving. On the other hand, your pledged FD keeps earning interest too! But remember that you are not allowed to close that pledged FD until the secured credit card is either closed or reaches the expiry date.

Also Read: How Much Tax Am I Paying On My Mutual Fund Investment?

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