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What is meant by a fixed deposit?



The term "fixed" in Fixed Deposits denotes the period of maturity or tenor. Fixed Deposit, therefore, pre plans a length of time for which the depositor decides to keep the money with the Bank and the rate of interest payable to the depositor is decided by this tenure. Rate of interest differs from Bank to Bank. Normally, the rate is highest for deposits for 3-5 years. This, however, does not mean that the depositor loses all his rights over the money for the duration of the tenor decided. Deposits can be withdrawn before the period is over. However, the amount of interest payable to the depositor, in such cases goes down.

Every Banks offer fixed deposits schemes with a wide range of tenures for periods from 7 days to 10 years. Therefore, the depositors are supposed to continue such Fixed Deposits for the duration of time for which the depositor decides to keep the money with the bank. However, in case of need, the depositor can ask for closing the fixed deposit in advance by paying a penalty. Soon some banks have even introduced variable interest fixed deposits. The rate of interest in such deposits will keep on varying with the prevalent market rates i.e. it will go up if market interest rate goes and it will come down if the market rates fall.

The rate of interest for Fixed Deposits (FD) differs from bank to bank. When the interest rates were regulated by RBI all banks used to have the same interest rate structure. The present trends indicate that private sector and foreign banks offer higher rate of interest.

Tax deduction

Banks should deduct tax at source on interest paid in excess of Rs. 5000 per annum to any depositor. This is not per deposit but per individual. Therefore if an individual has 5 deposits and the aggregate interest earned on these is Rs. 7000 though in each individual deposit, interest should not exceed Rs. 2000, tax must be deducted at source.

Operation

While opening a fixed deposit account, the bank must issue a fixed deposit that should state the following things on its face :

  • Date of issue
  • Due date
  • Amount
  • Rate of interest
  • Period of deposit
  • Amount at maturity

Early withdrawal

Sometimes a customer may want to withdraw his deposit before maturity. In such case, the customer would have to request the bank to do so. Banks are permitted, at their discretion, to allow early withdrawal and they can charge a penal interest for early encashment. The Reserve Bank states that penal interest must not be charged if the deposit is reinvested in a fresh deposit immediately. The rate of interest that will be paid is the rate for the period the deposit has been with the bank. Banks may prohibit premature withdrawal of large deposits held by entities other than individuals and HUFs if such depositors have been so advised at the time the account was opened.

Renewal

Deposits can be renewed on maturity on the request of the depositor. Deposits may be renewed before maturity in the following cases :

  • If the deposit is renewable before the date of maturity
  • If the period of renewal is longer than the remaining period of the original deposit.

Interest on renewal

Interest on renewal will be on the original deposit at the rate applicable to the period for which the deposit has actually run. Interest for the period from the date of renewal will be allowed at the rate existing on the date of renewal.

Maturity

The deposit matures at the end of the period for which it has been placed. On maturity, the depositor should instruct the bank to renew the deposit. The bank cannot do so without the customer’s instruction. If the depositor does not want to renew the deposit, he can ask for it to be paid to him either by a cheque/ draft or credited to an account he has. Normally this instruction would be in the account opening instructions. If the depositor does not renew or claim the deposit on its maturity, the deposit will be designated as an overdue deposit in the books of the bank. The bank cannot close and repay the deposit if the depositor does not make a demand. If the deposit matures on a Sunday/ holiday/ any nonworking days, the bank should pay interest at the originally contracted rate on the deposit amount for the Sunday/ holiday/ non business day. The deposit would be paid back on the succeeding working day.

Renewal of overdue deposits

Banks can renew deposits at an interest rate prevailing on the date of maturity provided the depositor approaches the bank within 14 days from the date of maturity of the deposit; if the application is made after 14 days the rate of interest must be the rate prevailing on the date of renewal of deposit.

Banks are free to decide the rate of interest between the date of maturity and the date of renewal. The policies on all aspects of renewal of overdue interest are to be decided by the respective boards of banks. This policy should be non discretionary and non discriminatory.

Advance on Fixed Deposits

Banks may grant loans on the security of the fixed deposit but they should maintain a reasonable margin on any advance or facility given against the security of a term deposit. Banks are free to charge a rate of interest on such lending without reference to its prime lending rate (BPLR). If the term deposit is withdrawn before completion of the prescribed minimum maturity period it must not be treated as an advance against the term deposit and interest must be charged at the rates prescribed by the RBI.

On advances given on the security of fixed deposits to third parties up to Rs. 2, 00,000 banks can charge interest without reference to its BPLR. If it exceeds Rs. 2 lakhs it must be at the rates prescribed by the Reserve Bank (RBI). All the transactions must be rounded to the nearest rupee. Fractions of 50 paise and above will be rounded up and fractions below 50 paise will be rounded down. Cheques issued by a customer, which containing fractions of a rupee should not be rejected or dishonored.

Joint Holdings

Fixed deposits may be in the name of an individual or in the joint names of two or more persons. In case of joint holdings, if one of the joint depositors requests for premature withdrawal, it should be done only after getting the approval of the other depositors. At the same time if one of the joint depositor wants a loan against a fixed deposit, it should be given only after all the other joint holders have signed the request.

Any one joint depositor’s request should not be entertained in such accounts; all the requests should be signed by all the joint holders.

Loss of Fixed Deposit Receipt

A fixed deposit receipt is not negotiable or transferable. If the receipt is lost, customers can ask for a duplicate. This is because banks are firm on fixed deposit receipts to be discharged and surrendered before payment is affected.

Therefore in a joint holding account, all the holders should request for a duplicate receipt in writing and execute a letter of indemnity to issue a duplicate. A note should also be made in the bank’s records that a duplicate has been issued.

Repayment

If the deposit with interest is Rs. 20,000 or more the repayment must be by an account payee cheque. It can also be made by crediting to the current/ savings account of the depositor.

Repayment of interest or principal should not be made to the account of another person and it is usually made in the name of the first named person.

Tips to remember while going for a Fixed deposit

  • Decide in advance, the period for which he is ready to invest.
  • Shop around for the best rate of interest available.
  • Avoid Banks which do not have a long history
  • If you need a part of the money before your deposit matures, seek your banker's advice whether taking an overdraft will be beneficial.
  • You need to be very careful while entrusting your money to finance companies which promise high rates of interest
Deposits and Bank Accounts
Fixed deposits