Is FD Worth Investing In 2020?

An FD i.e. Fixed Deposit is a traditional, popular, and safest investment instrument, and many prefer FD over other investment plans. If offers a better interest rate than a savings account and available in almost all the Indian banks. Also, investment in FD is eligible for tax deduction under 80C but tax-saving Fixed Deposit has a lock-in period of 5 years.

Is FD worth investing?

Fixed Deposit is a traditional and safe investment option for long term as well as short term. FD pays a fixed rate of interest until a given maturity date and the interest rates are higher than the normal savings account. Apart from a higher interest rate than a savings account, it has many other benefits that attract many investors and makes it a preferable option for investment. Let’s go through some of the key benefits of Fixed Deposit;

Top 5 Advantages Of Investing In FD

  • Assured Returns: As I explained earlier, your rate of interest is booked until the date of your FD maturity therefore your returns are secure. However, your return on investment may vary on premature withdrawal i.e. when you break the FD before maturity date for any reason.
  • More Return than Savings Account: It offers more return than the savings account therefore, it’s a good choice to keep your money in FD rather in savings account if you don’t see any large expenses coming in near future. Savings account hardly offers 4% interest which is far below the inflation rate, therefore, putting money in a savings account, actually decreasing its value.
  • Flexibility Of Tenure: Unlike any other financial instruments, you can have a fixed deposit for 7 Days till 10 years. Interest rates vary based on FD tenure but still better than the savings account.
  • You can get Loan on FD: You may take a loan against your investment in FD during your tight financial issues or difficult times. Banks usually give 60 to 90% loan against your fixed deposit which is good for hassle-free loans during unexpected financial needs.
  • Eligible for Tax Deduction: Your investment in FD is eligible for the tax deduction under section 80C. However, to avail of the tax benefit, you must invest in FDs which has a locking period of 5 years. Therefore, it is a good choice for tax saving planning.

How to Open A Fixed Deposit Account?

Opening a fixed deposit is very easy and straight forward. If you have online banking, then you can open it from there on a few clicks only. No approval required and it is opened on the spot. However, you can also visit any nearest bank (I would suggest known and well established nationalized banks) and request for it. They will ask you to fill a small form and ask for some documents like Aadhaar Card and Pen card to open a Fixed Deposit Account.

You can also open a FD account with Indian Post Office.

But, is Fixed Deposit a Good Investment?

I Agree, FD has many benefits but I don’t prefer FD anymore for the investment purpose. Gone are the days when interest rates of the FD used to be between 8%-9% and FD were generating wealth in the longer run. I have seen, investment getting doubled within 7 to 8 years but it is not the case in now.

Following is the example of interest earned on INR 1 Lakh in 10 years to make my point here. I would prefer PPF i.e. Public Provident Fund for long term investment rather than FD. Check out this FD Calculator and try it out by yourself.

FD interest rate on 100000 at 6% interest rate

Nowadays, the interest rate of FD has gone down below 6% which is not enough to beat the current inflation rate. Plus, FD blocks your money and premature withdrawal erases your returns. You may find interest rate still beating the current inflation rate;

But wait, do you know about TDS deduction on your FD returns?

Bank charges TDS (i.e. Tax Deducted at Source) on the interest earned and it very depends on your total interest. The TDS rate on fixed deposits is 10% if the interest amount for the entire financial year exceeds INR 40,000 and INR 50,000 for the senior citizens. And, banks will charge 20% TDS if you haven’t provided a PAN card is not updated in your bank.

But it is not a tax exemption, you will not be charged TDS on your interest income if it is below INR 40,000 but you have to add this interest income to your annual income and you will be taxed according to your tax slab.

If you have a joint FD account with your spouse or family members then the TDS rate will be applied against the first holder’s PAN (i.e. Permanent Account Number).

In a nutshell, a 6% interest on your FD is 5.4 % unless your income slab falls under INR 2,50,000 annually. Also, if your income slab is more than 10 Lakhs then the income tax will be applied at 30% (i.e. 30% of the interest earned on FD will also be deducted and your FD return will come to 4.2%).

One can afford to neglect or avoid these points because FD is considered as the safest investment instrument but;

Is Your Investment In FD Really Safe?

Well, surprisingly “NO”, your investment in Fixed Deposit is not fully safe. As per current financial law, each depositor in a bank is insured up to Rs 5 lakh for both the principal and interest amount on deposits held by him/her in that particular bank however, previously it was only INR 1,00,000.

What does it concern you?

It is simple if you have a fixed deposit in any bank that exceeds INR 5,00,000 and the bank goes into bankruptcy then you will get only INR 5,00,000 including your interest earned. This applies to each bank, therefore if you have the FD with multiple banks then you can get higher insurance. E.g. if you want to invest 20 Lakh in FD then open FD in 5 different banks. This way you will have full insurance on your deposits.

Alternatively, to safeguard your money, open Fixed Deposits only in nationalized and popular banks like SBI, HDFC, ICICI, etc. Small banks sometimes offer higher interest rates on FD but such banks are not secured and always have risks.

I’m not trying to say that, people should avoid FD and put money in other saving schemes like mutual funds, PPF, National Bonds, etc. If FD is so bad then why still people are investing in it? and why banks are still promoting this investment plan? Because it is beneficial for many people due to their personal preferences and risk appetite.

Who Can Opt For Fixed Deposit Investment?

  • Retired People: Fixed Deposit could be a good investment instrument for the retired people whose bread and butter depends on their savings. FD guarantees fixed and risk-free interest, which makes it reliable. Other good options are there but those aren’t flexible and mostly comes with a 3 to 15 years lock-in period.
  • Someone with short term investment view: FD provides great flexibility on your investment tenure. You can book FD for 7 days to 10 years based on your requirements. Therefore, if you see any fund requirement in the coming couple of months but still want to enjoy better interest rates than a savings account, you can go for a fixed deposit.
  • Investors Waiting for the right opportunity in Market: There might be situations where you don’t want to block your money for a long time. Probably you are waiting for some good opportunity in other investment options like share market, mutual funds, etc. You can always park your money in FD until the opportunity arises. This will give you more interest rates than savings account and flexibility to withdraw fund anytime you want.
  • Non-Resident Indians: NRIs get benefits when they invest in FD in their NRE account. They get tax exemption on the interest earned on the Fixed Deposits in their NRE account. Therefore, it attracts many NRIs to open an FD Account as part of their financial planning.

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Financial investments are always your personal preference and depend upon your risk appetite and time-frame. You should always consult your financial advisor and go through all terms and conditions before investing in any investment plan.

I hope you enjoyed reading this article. I didn’t try to influence or stop you from investing in FD but shared my personal opinion on investing in FD. I don’t consider investing in FD for a long term basis but still prefer it when I see money requirements in the next 9 or 18 months. A fixed deposit may not offer the best interest rate but it still offers a better interest rate than savings account with the flexibility of investment tenure.

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