What is Fixed Deposit (FD) ? Advantages of a Fixed Deposit Account

Advantages of Having a Fixed Deposit Account Broke? Fix it with Fixed Deposits

What is Fixed Deposit (FD)?

Fixed deposit is a financial investment instrument offered by banks & NBFCs wherein investors can deposit money and get a high rate of interest than a normal Savings Account.

Here are the advantages of having a fixed deposit account:

Encourages Savings

“Do not save what is left after spending, but spend what is left after saving.” – Warren Buffet. This stresses the importance of savings. A fixed deposit account holder will inadvertently save money, since FDs require the holder to invest a lumpsum amount for a fixed period of time. Premature withdrawals attract penalties.

For example, a FD of Rs. 1,00,000 invested for 3 years at 9% interest rate, if withdrawn after a year, will get interest at the rate applicable at that time, which will be lesser than 9%. The loss of interest becomes the penalty that you pay for a premature withdrawal.

Tax Benefits

Tax-saver FD attracts tax benefits under section 80C of the Income Tax Act, 1961. It falls under the Exempt-Tax-Exempt category. Although the interest earned on such FDs is taxable, you can claim a deduction of a maximum of Rs. 1,50,000 for the amount invested.

Safe Investment

FDs are risk free investments. Unlike other investment tools, FDs are not market-driven. You get an assured sum of money at the end of the maturity period. This is thus an attractive investment for risk-averse investors.

Higher Rate of Interest

The FD Interest Rate is higher than that on saving deposits. For example, Axis Bank offers 4% interest on saving bank accounts, whereas the minimum interest that a FD attracts is 5.5%.

Liquidity

An asset is liquid when you can easily convert it into cash. FDs are liquid. Although the holder will be charged a penalty, FDs can be withdrawn as and when needed. Thus, you always have a certain sum of money to bank on.

Flexibility

The tenure of FDs varies from 7 days to 10 years. You can invest in Digital FDs for a tenure that matches your business or personal needs. Suppose, you plan to get your child in a particular school in another 5 years, you can opt for a tax saving FD as it has a lock-in period of 5 years.

It is said, when you don’t work, your savings will work for you. Act wise by investing in FDs and make a smart financial move by reducing your tax liabilities.