Spend, Save and Invest Smartly

Types of Fixed Deposits





You must have heard the famous saying"Variety is the spice of life". A monotonous life can be boring and change spices up your life. A new motorbike, a change in your job profile or just buying clothes of different colors to spice up your life. Change is the only constant and fixed deposits cannot be left behind. Fixed deposits can be of different types.....So let’s take some time out to study fixed deposits.

The regular fixed deposit

You deposit your money with a bank for a fixed time period called tenure of the fixed deposit. You get a higher interest on the money which you deposit in your fixed deposit than in a savings bank account. On maturity of your fixed deposit you are paid back your principal with interest.

You are not supposed to touch the money in the fixed deposit for the time you make the deposit. If you are in urgent need of money you can break your fixed deposit (Withdraw money from your fixed deposit).

You have a penalty of 0.5-1% lower interest on your fixed deposit than promised if you do so.

Let us understand how a regular fixed deposit calculates and pays you interest on the money you deposit with them.
The interest paid to you is generally compounded quarterly
You have deposited INR 1 Lakh with a reputed bank. You are paid an interest of 8.5% compounded quarterly. Your fixed deposit matures in a year.

You have the formula :
A = amount at the end of the year.
P = principal invested
R = rate of interest
N = quarterly compounding. (Compounded for 3 months out of 12 months or 4 times a year)
T = time period of the investment = 1 year.
A = 1,00,000 (1+ 0.085/4) ^ (4*1) = INR 1,08,775. Interest got on the fixed deposit after a year= INR 1,08,775 – INR 1,00,000 = INR 8,775.

The flexi fixed deposit

In a flexi fixed deposit your fixed deposit is linked to a savings bank account. Your money moves between the fixed deposit and your savings bank account.

The flexi fixed deposit is also called the sweep in – sweep out fixed deposit. How does the flexi fixed deposit work? You deposit INR 2 Lakhs in a flexi fixed deposit (fixed deposit linked to a savings bank account) and your bank pays you an interest of 8.5% compounded quarterly.

You have issued a cheque of INR 1 Lakhs, but there is only INR 50,000 in your savings bank account. Your bank will transfer INR 50,000 from the fixed deposit to your savings bank account to honor your cheque. The remaining amount of INR 1.5 Lakhs will remain in your fixed deposit and earn an interest of 8.5% compounded quarterly. There is a sweep in of money to your savings bank account and a sweep out of money from your fixed deposit.

A savings bank account only pays you around 4% interest a year on the money you deposit with them. If you have excess money in your savings bank account you could set a trigger. If you have INR 2 Lakhs in your savings bank account, you could set a trigger of INR 1 Lakh .An amount of (INR 2 Lakhs – 1 Lakh) is transferred from your savings bank account to your fixed deposit and it earns you an interest of 8.5% compounded quarterly. Money is swept out from your savings bank account and swept into your fixed deposit so that you earn a higher interest rate.

The 5 year tax saver fixed deposit

The 5 year tax saver fixed deposit is unique from other fixed deposits. You enjoy a deduction of INR 1.5 Lakhs a year under Section 80 C of the income tax act if you deposit your money in a 5 year tax saver fixed deposit. Not all fixed deposits enjoy the Section 80 C benefits. You have to invest your money in a tax saver 5 year fixed deposit to avail this tax saving benefit. This fixed deposit is non callable (you cannot break the fixed deposit for 5 years).The interest paid to you on maturity of the fixed deposit is taxed as per the income tax slab you fall under. You cannot pledge your 5 year tax saver fixed deposit and avail a loan against it. You cannot avail an overdraft facility on your 5 year tax saver fixed deposit. You need to remember to choose your fixed deposit depending on your needs. Adopt the "Horses for Courses"policy where the fixed deposit you choose helps you meet your financial goals and needs. Invest wisely in a fixed deposit and watch your money grow.

Deposits and Bank Accounts
Fixed deposits