Fixed deposits (FD) are secured investment options suitable for conservative investors. People invest in fixed deposits to get assured returns that are higher than other low-risk options like savings accounts. FDs are also used to diversify one’s portfolio to reduce risks. However, FD investors often look for high returns.
While the interest rates are predetermined and fixed for tenure, there are several ways to maximise FD returns from the same FD investment. Discover the ways to maximise your earnings from fixed deposits here.
Increase Fixed Deposit Profits with Different Types of FD
Here are the different types of fixed deposits you can consider to maximise FD returns:
1. Regular Fixed Deposits
A regular fixed deposit is a conventional fixed deposit wherein investors deposit a lump sum of money for a specific tenure to receive a predetermined interest rate. The interest rate of regular fixed deposits is relatively higher than savings account interest rates.
2. Senior Citizen Fixed Deposits
Banks usually offer a higher rate to senior citizens (above 60 years) on fixed deposits. Certain banks offer an additional rate for super-senior citizens and employees. Thus, the interest rates on a senior citizen fixed deposit are higher than a regular fixed deposit for a given tenure and amount.
3. Tax-Saving Fixed Deposits
Tax-saving fixed deposits usually offer the same interest rate as regular fixed deposits for a specific tenure and amount. However, depositors can avail tax deductions under Section 80C of the Income Tax Act for the deposited amount of up to ₹1.5 lakhs in a tax-saving FD, leading to higher tax-adjusted income. Tax-saving fixed deposits have a 5-year lock-in period.
4. Flexi Fixed Deposits
A flexi fixed deposit allows investors to withdraw money based on their requirements without the need for a premature withdrawal. The depositor continues to earn interest on the remaining deposit amount at the agreed-upon rate. Unlike regular fixed deposits that levy a penalty of around 1% on the effective interest rate as a premature withdrawal penalty, funds withdrawn from flexi fixed deposits are charge-free.
5. Sweep-in Fixed Deposits
Banks offering sweep-in FDs transfer excess funds beyond a threshold limit from a depositor’s savings account to a sweep-in deposit. It helps them earn higher interest rates on the fixed deposit compared to the savings account. Depositors can withdraw their funds from the sweep-in fixed deposit when they need to without any additional charges.
6. Cumulative Fixed Deposits
A cumulative fixed deposit pays investors the principal and interest together on maturity. It helps investors earn a higher interest amount as the accrued interest is reinvested. Through the power of compounding, investors earn higher interest amounts than regular fixed deposits for the same tenure. Unlike regular fixed deposits that pay interest monthly, quarterly, half-yearly, yearly or annually, cumulative fixed deposits pay the principal and interest amount at maturity.
7. Non-cumulative Fixed Deposits
A non-cumulative fixed deposit helps investors earn regular income. These fixed deposits offer interest payout at a certain frequency, such as monthly, quarterly or annually. As a result, depositors can earn regular interest based on their chosen payout option for a fixed tenure.
8. Company Fixed Deposits
NBFCs (Non-Banking Financial Companies) offer company fixed deposits or corporate fixed deposits to investors. Usually, corporate FDs offer a higher interest rate than regular bank FDs. Individuals, associations and corporations can open a corporate fixed deposit. However, it is essential to consider the credit rating of the company provided by CRISIL, Care, ICRA and others.
FD Investment Tips India
Here are the tips to maximise FD returns in India:
1. Split Your Fixed Deposits
One of the best ways to maximise FD returns is to split your deposit principal into multiple fixed deposits. You can book separate fixed deposits for various tenures to increase your returns from fixed deposits. Further, you can book separate fixed deposits with different banks offering variable interest rates for different tenures- a technique called FD laddering.
For instance, if you plan to invest ₹5 lakhs in a fixed deposit, instead of opening one fixed deposit of the entire amount, you can open five separate fixed deposits of ₹1 lakh each for different tenures. This can earn you a higher interest yield on your fixed deposits.
Alternatively, consider that Bank A offers 6.80% p.a. interest for 2 years, and Bank B offers a 7.00% p.a. interest rate for the same tenure. However, for a 3-year term, bank A offers 7.20% p.a. while bank B offers 7.10% p.a. In such a case, you can book one fixed deposit with Bank A for 2 years and another with Bank B for 3 years to maximise your returns.
2. Auto-renew Your Fixed Deposits
Banks allow investors to choose auto-renewal or auto-closure of fixed deposits while booking. If you choose auto-closure, the principal and interest amount will be credited to your savings bank account upon maturity. Thereon, it will earn at the savings account interest rate (which is lower than FD rates) until you book another fixed deposit.
If you opt for auto-renewal on maturity, the principal and interest amount gets booked as a fixed deposit automatically. However, the tenure of your renewed fixed deposit remains the same as your previous fixed deposit. The new interest rates for your chosen tenure will apply.
3. Opt for Cumulative Fixed Deposits
A cumulative fixed deposit helps investors earn a higher interest amount as the accrued interest gets compounded. You earn a higher interest amount on the compounded interest in addition to the principal amount. Thus, opting for a cumulative fixed deposit can be one of the ways to maximise FD returns.
4. Redirect to Senior Citizen Fixed Deposits
If you have a senior citizen in your family, you can open a fixed deposit in his/ her name with you as the joint account holder. This can help you earn a higher interest rate on the deposit amount for a given tenure. Senior citizen fixed deposits provide higher interest rates than non-senior citizen fixed deposits.
5. Consider Corporate Fixed Deposits
You can book a corporate fixed deposit offered by NBFCs. These fixed deposits offer higher interest rates compared to fixed deposits offered by scheduled commercial banks. However, be sure to check the credit rating of the company you are investing in to avert risks. You can seamlessly earn higher interest amounts on company fixed deposits for a given tenure and sum of money.
The Bottom Line:
Besides the different ways mentioned above, you can invest in flexi FD or a deposit with the sweep-in facility to maximise FD returns. A flexi fixed deposit will allow you to earn FD interest rates on the deposited amount while you withdraw funds for your use. A sweep-in deposit will allow you to transfer excess funds to an FD account to earn higher interest rates than savings accounts.
Frequently Asked Questions
If you are a non-senior citizen, you can avoid TDS (tax deducted at source) deduction on FD interest by submitting Form 15G to your bank at the beginning of the financial year. If you are a senior citizen, you need to submit Form 15H to your bank at the beginning of the financial year. Note that your income must be below the taxable limit to forego the TDS deduction.
A tax-saving fixed deposit has a lock-in period of 5 years. If you book a tax-saving fixed deposit, you can avail tax deductions of up to ₹1.5 lakhs under Section 80C of the Income Tax Act,1961. However, the interest on the fixed deposit is taxable upon withdrawal.
Fixed deposits are non-transferable investment instruments. As a result, you cannot transfer it from one person to another during the booking tenure. Alternatively, you can have joint holders in your fixed deposit for joint FD operation.
