Hyderabad: Retirement is mandatory for all employees. For those who are financially disciplined, retirement life will be peaceful. But, many people make a mistake in understanding retirement. As a result, they fail to set up adequate funds. One should look into fixed deposits that offer safe returns to create a retirement fund with investments. In fact, a portfolio is incomplete without FDs.
Protection of investment, the guarantee of returns, the flexibility to choose time as desired, and fixed deposits (FD) have many advantages. These include instant cash withdrawals when needed. It cannot be combined with other financial schemes. Banks have increased their fixed deposit rates significantly in recent times. Some banks offer interest up to 8.5-9 per cent.
On the other hand, RBI has announced a pause without raising the repo rate. In this context, let's see what are the points that those choosing FDs for their retirement should keep in mind.
Right place…
Fixed deposits are offered by banks, small finance banks and Non-banking Financial Institutions (NBFCs) at different interest rates. Some small banks and NBFCs offer higher interest rates compared to government banks. Some other corporates are also making NCDs available at around 9 per cent interest.
It is mandatory to check the ratings given by rating agencies like CRISIL and ICRA when choosing to invest in small banks and NBFCs. The decision should be made by looking at the reliability in the market, debt repayment capacity, and history of the issuer. While depositing in NBFCs and corporate bonds other than banks, preference should be given to those with higher ratings.
When do you need interest?
FDs can be classified as cumulative and non-cumulative deposits. In the cumulative method, the interest is compounded annually on the principal. After the expiry of the period, principal and interest are paid. Interest is paid monthly, quarterly, six months and annually in a non-cumulative manner. Cumulative fixed deposit contributes to wealth growth in the long run. Those who want to set up a retirement fund should opt for this.
Choose carefully…
Fixed deposits last for a fixed period. Some delinquency charges apply if taken in between. So, one should act with some foresight while choosing the duration. As far as possible do not make all deposits for a single period. The time should be decided to consider your needs arising in different situations. This allows the withdrawal of deposits without detecting the amount from your FD.
To earn extra interest…
Sometimes our fixed deposit may offer lower interest. In such cases, the deposit should be cancelled and a new FD should be made. This can avoid loss of interest. It can be examined only when it is obtained at least half a per cent more. For example, suppose two years ago you deposited for five years. According to the prevailing interest rates then it was not more than 5.50 per cent. But, now banks are giving interest up to 7-7.5 per cent for three years. So, that deposit can be cancelled and a new deposit can be made.
If you have to take it earlier…
FDs have stood the test of time. That is why many consider FDs as a reliable investment. If the investment has to be withdrawn before maturity, the depositors can try to take a loan. This will avoid delinquency charges on the deposit.
Tax is applicable…
Interest earned on fixed deposits is subject to tax, depending on the applicable slabs. Banks do not deduct tax at source when interest income is less than Rs 40,000 (Rs 50,000 for senior citizens) in a financial year. Those who are likely to get high interest should submit Form 15G and Form 15H (Senior Citizens) to the banks. This avoids the deduction of tax at source.
Can make investments online
Now there is no need to go to the bank for making a fixed deposit as deposits can be made easily in banking mobile apps. Corporate FDs and NCDs can be done with the help of a Demat account.
Also read: Fixed Deposits: Get high returns at no risk
