How to open a fixed deposit account

03 Jul 2019

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How to open a fixed deposit account

Fixed deposits and the importance of having one

Time deposits or Term deposits are most commonly known as fixed deposits. Apart from mobilising funds from demand deposits like savings and current accounts, banks also resort to fixed deposits to raise funds. Fixed deposit, like the word suggests, have a fixed duration.

How to open a fixed deposit account

Now that we know what a fixed deposit (FD) is, let us see how we can open a fixed deposit account.

Fixed deposit accounts can be opened in the same way a savings account is opened.

One can either go to a branch of the bank and open a fixed deposit account after choosing the tenure or the person can use internet banking to open an account.

Banks these days offer the flexibility of automatically transferring money from the savings account to the fixed deposit account above a threshold limit as prescribed by the customer. It is called auto-sweep facility.

The key variable to choose in a fixed deposit account is the tenure. The interest rate is fixed by the bank.

Fixed deposits can be opened in banks where one does not have an account. However, here the documentation process is long, and one will need to provide all the details needed in a Know-Your-Customer (KYC) documentation.

There is no restriction in the number of fixed deposit accounts one can open.

Fixed deposits offer better interest rates as compared to a savings account but do not offer the customer the flexibility of withdrawing money as and when they want.

Duration of fixed deposits can vary from a few days to longer-term deposits which can go on for years. Interest changes with time. Higher the time period for which the money will be locked in higher will be the interest rates.

For example, a deposit for 7 days is generally given an interest of 3.5 per cent annualised while that for a year maybe around 6.5 per cent. The shorter period deposits will be more aligned to the savings deposits while the longer term deposits will be aligned to the bond market rates. The maximum period for which fixed deposits are offered is 10 years.

Banks offer higher interest rates for Fixed deposits to compensate for liquidity. Also, they seek longer-term deposits in order to lend the money to projects which have a long gestation period.

The longer-term deposits are more aligned to the bond markets where they compete with corporate and Non-Banking Finance Companies (NBFCs) for money.

Fixed deposits in the form of bonds or debentures are offered by corporate and NBFCs. Bond markets are increasingly getting a popular source of funds for corporate also as they do not have to go through the lengthy process of raising money through the banking system.

Mutual funds, especially the debt funds invest the money raised through the public in bonds. Thus fixed deposit rates of the banks have to be attractive enough to prevent depositors from running to mutual funds or the bonds offered by NBFCs.

In order to make the deal more attractive banks have over the years started offering frills with a Fixed Deposits account such as overdraft facility, zero cost credit cards, nomination facility, safe deposit lockers, internet banking among others.

Fixed Deposits earn higher interest than a Savings Account because the former gives them leg room to lend to people who need the money for roughly the same time limit. A one-year fixed deposit in a bank can allow the bank to lend money to a person who requires a personal loan for one-year period.

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How is Interest on Recurring Deposit Calculated

A recurring deposit is one of the best ways a small investor can invest funds and grow them. In a recurring deposit, a fixed amount of money is invested at a fixed duration for a fixed period of time. These installments all mature on the same date. Essentially, a recurring deposit is like having multiple fixed deposit investments, all of which mature on the same day.
You do not have to wait till a recurring deposit matures to find out the interest that you will earn on a recurring deposit. If you’re wondering how to calculate RD interest, then read this guide.
How to calculate recurring deposit interest using a calculator:
With the digital revolution in banking, the services offered by banks have undergone a sea change. It is no longer necessary to invest in a recurring deposit to find out how much you will earn on maturity. There are several banks that have a recurring deposit interest calculator on their website. This tool addresses how to calculate interest on RD account.
To calculate the RD account interest, you need to input the following:

Installment amount
Rate of interest
Period of investment

After putting in these details, you need to click submit and the calculator will show you the maturity amount. Using this calculator can help you find out the total interest you can earn on a recurring deposit instantly. It is very essential to use this calculator to find out the maturity amount and the interest as it can help you find out how much to invest if you’re raising funds for a particular goal. One important thing to remember is that banks compound interest quarterly on these deposits.
If you’re investing for a senior citizen, the rate of interest on such deposits is higher.
How to calculate RD interest manually?
If you’re wondering how to calculate compound interest for recurring deposit, you can use this formula:
M = P*(1+R/N)^Nt
Where M = Maturity amount. P = Principal amount or the installment amount R = Interest rate in decimal, convert interest rate into decimal by dividing it by 100 T = Time duration in months t = Time duration in years N= compounding frequency (since it is quarterly, it will be 4)
This formula is the formula for calculating compound interest. Banks generally compound interest quarterly on deposits. However, to calculate compound interest on recurring deposit, the balance at the beginning of the quarter is considered. So, if you open a recurring deposit between a quarter, simple interest is calculated for the months till a new quarter begins and from the new quarter, compound interest is calculated. This is why there may be a slight difference between manual calculation and the amount that a holder may receive on maturity. Important points to remember about recurring deposit interest:

Interest on recurring deposit is taxable. This interest will be added to your taxable income and you will have to pay tax on it based on the slab you are in.
Your bank will deduct tax if the total interest on recurring deposit exceeds Rs. 10,000 in a year. You can submit Form 15G/15H declaring that your income won’t be in the taxable slab. On submission of this form, the bank won’t deduct tax on your recurring deposit income.
Senior citizens get a deduction on interest earned through recurring deposits under Section 80TTB up to Rs. 50,000. Section 80TTB gives a deduction on interest income from savings account interest, fixed deposit interest, recurring deposit interest etc.

PPF Tax Benefits & Features you must Know About

A popular investment and tax saving instrument for Indians since it was first introduced in 1968 by the Central Government, the Public Provident Fund is a great tool to boost small savings by every individual across India. One of the biggest reasons thousands open opt for PPF is the PPF tax benefits.
The following are the features of a PPF for your comprehensive understanding:
The PPF is a long-term investment with a minimum tenure of 15 years. PPF holder can extend the tenure by a period of 5 years every time.
Rate of interest
The rate of interest is determined by the Ministry of Finance every quarter. The compound interest is paid out at the end of the financial year i.e. on March 31. The interest is determined based on the balance between the closing of the 5th day and last day of each month.
Limits on investment
PPF is appealing to every section of society with different income levels. The minimum deposit every financial year is Rs.500 while the maximum amount is Rs.1, 50, 000. You can deposit the amount in lumpsum or in instalments in a financial year.
Opening Balance
You need to have at least Rs.500 to begin with when you open the account. Maximum amount upto Rs.1,50,000 can be invested every year and is eligible for exemption under section 80C of IT Act.
Mode of deposit
There is limited restriction on how you can deposit money into your PPF account. You can transfer funds online, deposit cash, cheque or pay through a demand draft.
Frequency of deposit
The account holder needs to make a deposit at least once a year for 15 years.
The account holder may nominate one or more people (maximum 4) who will receive the amount in the PPF in case of the account holder’s death. The amount that each nominee will receive can also be determined by the account holder during nomination.
Joint account
One individual can hold only one PPF account at any given point of time. No joint account is allowed.
The PPF is backed by the government and offers complete protection of investment regardless of market conditions.
You are eligible to take loan against your PPF provided it is between its 3rd-6th Financial year. The loan amount is capped at 25% of the balance in the 2nd year preceding the year in which you applied for the loan.
You need to be an Indian citizen residing in India. Members of HUF cannot open a PPF account. One eligible individual can hold only one PPF account. However, an individual can hold another PPF account on behalf of a minor.
Can one withdraw from their PPF before maturity?
A PPF account can be closed only when it completes 15 years. However, if the account holder needs to withdraw money from their PPF account due to a financial emergency, they can do so only from the 7th year onwards. These withdrawals can be made only once in a fiscal year.
What are the tax benefits offered with a Public Provident Fund? Is PPF maturity taxable?
A PPF is categorised as EEE which stands for Exempt-Exempt-Exempt. This means that the principal amount can be deducted under Section 80C of the Income Tax Act, 1961.
Furthermore, there is no PPF maturity tax i.e. the account holder does not have to pay tax on the interest accumulated on maturity of the PPF or the total amount post maturity.
A simple enough tax saving instrument with good rate of interest, you can start a PPF for yourself or your child with Bank of Baroda.

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