Spend, Save and Invest Smartly
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. 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 Deposits can be withdrawn before the maturity period also but the amount of interest payable to the depositor, in such cases goes down.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 any emergency, the depositor can ask for closing the fixed deposit in advance by paying a penalty.
A fixed deposit account allows you to deposit your money for a set period of time, thereby earning you a higher rate of interest in return. At the end of maturity period the depositor gets its principal amount plus interest earned over the maturity period. Fixed deposits also give you a higher rate of interest than a savings bank account. It is one of the oldest and most popular forms of investment across India.
Fixed deposit offer better returns than saving accounts to depositors. Moreover, there are several forms of fixed deposits such as recurring deposits where depositors pay a fixed amount at regular intervals and get back the amount with accumulated interest at the end of the prescribed period.
Though FDs give depositors a fixed return on their investments, there are certain drawbacks of FDs.
|Bank||Interest Rate||Minimum Balance (Rs.)|
|Indian Overseas Bank||6.5%||10,000|
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. You are eligible for tax deduction if the term of investment is more than 5 years.
While opening a fixed deposit account, the bank must issue a fixed deposit Bond that should state the following things on its face :
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 rate of interest that will be paid is the rate for the period the deposit has been with the bank.
Early withdrawals invite penalty of 1-2% depending upon the bank. The Reserve Bank states that penal interest must not be charged if the deposit is reinvested in a fresh deposit immediately.
The deposit matures at the end of the period for which it has been placed. On maturity, the depositor can 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.
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.
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.
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.
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.
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.