A guide to Fixed Deposits and Savings Schemes

Ever thought about how easy it would be if there was an investment scheme where you could just park your capital and forget about it? And over and above that, how cool would it be if that investment option consistently earned you returns that you could either reinvest or withdraw? And the icing on the cake – what if you could withdraw your capital at any point in case you needed those funds for some emergency? That would be such a flexible investment option, isn’t it?

It turns out that we do have something exactly like that – a fixed deposit. Want to know more about it? That’s exactly what this chapter is all about. Here’s we’ll answer some of the important questions related to this investment option, such as:

What is a fixed deposit?

How does a fixed deposit work?

How to invest in a fixed deposit?

Come, let’s get started.

What is a fixed deposit?

A fixed deposit is an investment instrument provided by banks and NBFCs. It allows investors to deposit a certain sum of money, so they can earn interest on that sum. Needless to say, the longer you remain invested in a fixed deposit, the more interest you can earn. Remember Subash from our anecdote earlier? Being financially savvy, he also has a bank fixed deposit as an option in his investment portfolio. Let’s use that FD as an example to understand how these instruments work.

How does a fixed deposit work?

So, back when he was around 26, Subash received a huge bonus at work. While it was tempting to spend that money on the newest Apple smartphone, Subash decided to be smart about his personal finance and invested that money in a fixed deposit instead. His initial investment was Rs. 1,00,000.

Now, when you invest in an FD, banks require you to choose a tenure for the investment. This tenure can be as short as 7 days or as long as 10 years. Subash decided to opt the middle ground and booked his FD for 5 years. The rate of interest was 7.25% per annum. His FD tenure will come to an end next year, when he’s 31 years of age. And at the end of the tenure, his investment would have grown to Rs. 1,43,229. That’s a 43.3% return on his investment.

When Subash withdraws his money at the end of 5 years, he’ll receive his original investment amount, also known as the principal, amounting to Rs. 1,00,000. This will be accompanied by the interest of Rs. 43,229.

Fixed deposits also give you the option of receiving a monthly payout. In that case, when you choose the monthly payout option, you’ll receive a fixed sum of interest each month, over the course of your investment period. And at the end of the tenure, the principal alone will be returned to you.

How to invest in a fixed deposit?

That’s quite easy. You just need to approach the bank of your choice and open an FD account with them. Most banks and NBFCs even offer this facility online now, so you can book an FD from the comfort of your home. Before you invest in an FD, you need to be sure about some important metrics, such as:

• The amount you’re going to invest
• The tenure for which you wish to invest the money
• Whether you want to reinvest your interest or obtain it as a payout periodically
• The charges, if any, for premature withdrawal of your funds

A fixed deposit is among the safer investment options available in India. But if you’re a conservative investor who’s looking for investment schemes that are even safer, then the options introduced by the government may be some good choices for you to consider. And as always, the first step to including them in your financial plans is to understand what they entail.

You were already introduced to the provident fund schemes in the previous chapter. Aside from that, there are many other savings schemes available for the Indian investor. So, let’s look at what these savings schemes have to offer.

National Pension System (NPS)

As the name indicates, NPS is a long-term investment option that enables you to enjoy a steady pension income after you’ve retired. It is a safe and low-risk investment option that also offers you many tax benefits. 

Eligibility to invest

Any Indian citizen who is aged between 18 and 65 years of age as on the date of investment can invest in NPS. 

Salient features of NPS

• Your corpus is invested in a mix of investments like equity, government bonds and corporate debt instruments. The proportion of investment in each of these categories can be adjusted according to your age and risk appetite.
• Once the tenure is up, you can withdraw 60% of your capital as a lump sum amount. The remaining share is invested, so you can enjoy a periodical pension.
• Investments in NPS up Rs. 1,50,000 are eligible for tax deduction u/s 80CCD (1) – this is a subsection of 80C.
• Additionally, over and above the 80C deduction, investments in NPS up to Rs. 50,000 are eligible for tax deduction u/s 80CCD (1B).
• The amount that you get on maturity is also tax-free.

National Savings Certificate (NSC)

The National Savings Certificate is an investment scheme that offers investors a fixed income. If you’re looking for a low-risk investment option, you can easily open an NSC account with any post office. Coupled with the low risk, the returns are also low to moderate. 

Eligibility to invest

Any individual who is a citizen of India can invest in the NSC. NRIs, HUFs, partnership firms and companies cannot invest in this scheme.

Salient features of NSC

• The rate of interest on this scheme is fixed, and it is revised by the government every quarter. Currently, the rate is 6.8% per annum. 
• This scheme has a lock-in period of 5 years.
• You can invest as little as Rs. 100.
• There is no maximum limit on the amount of investment.
• NSC investments qualify for deduction under section 80C up to Rs. 1,50,000.

Post Office Monthly Income Scheme (POMIS)

This is one of the many post office deposit schemes backed by the government of India. You can start investing in POMIS by opening an account in a post office.

Eligibility to invest

Every Indian citizen is eligible to open a POMIS account.

Salient features of POMIS

• POMIS has a lock-in period of 5 years.
• The minimum amount you can invest is Rs. 1,500. The maximum amount is Rs. 4,50,000. 
• POMIS accounts can also be opened in the name of minors. The minimum age limit for minors is 10 years.
• You can earn interest at a steady rate of 7.6% per annum every month.
• Unlike most other government savings schemes, POMIS does not offer any tax benefits under section 80C.

Senior Citizens Savings Scheme (SCSS)

Unlike the other schemes we’ve seen so far, this one is an investment option for senior citizens. This scheme can be useful for seniors who wish to save even after they’ve retired. 

Eligibility to invest

Indian citizens who fall under the following categories are eligible to invest in SCSS.

• Individuals who are 60 years of age or above
• Individuals who are 55 years of age or above, and who have retired early under the superannuation or Voluntary Retirement Scheme (VRS) rules.
• Retired defence personnel provided they have satisfied other terms and conditions.

Salient features of SCSS

• The minimum amount of investment is Rs. 1,000. 
• The maximum amount is the lower of Rs. 15 lakhs or the amount received as retirement benefits.
• The lock-in period is 5 years. But after this, the period can be extended by a block of 3 years.
• The rate of interest on the investment amount is revised by the government every quarter. However, once you’ve deposited your funds, any future revisions in the rate do not affect your earnings.
• Currently, the rate of interest is 7.4%.

Sukanya Samriddhi Yojana (SSY)

This scheme was specifically introduced by the government of India to secure the future of a girl child. It is a long-term investment option that offers guaranteed returns and exposes you to low risk.

Eligibility to invest

If you’re the natural or legal guardian of a girl child aged 10 years or below, you can open a Sukanya Samriddhi Yojana account. You can open accounts for only two girl children only. If the second birth in the family results in twin girl children, or if the first birth results in three girl children, you can open accounts for three girl children.

Salient features of SSY

• This scheme offers an attractive interest rate of 7.6%.
• The amount invested, the amount earned as interest and the amount withdrawn are all deductible or tax-free.
• The minimum amount that can be invested in one financial year is Rs. 1,000.
• The maximum investment that can be made in one financial year Rs. 1,50,000.
• The investment matures after 21 years from the date of opening of the account.

Public Provident Funds (PPF):

The Public Provident Fund (PPF) scheme is a long-term investment option that is backed by the government of India. Like many other government-backed savings schemes, this is a safe investment avenue that you can rely on to create a corpus for your post-retirement life.

Eligibility to invest

Any resident individual can open a PPF account. A person who is a guardian of a minor can also open a PPF account on behalf of that minor.

Salient features of PPF

• The interest rate for PPF is fixed by the government every quarter. Currently, the rate of interest for the second quarter of FY22 is 7.1% per annum.
• The lock-in period for PPF investments is 15 years.
• You can extend your investment by a block of 5 years after the maturity period. 
• The minimum investment amount in each financial year is Rs. 500.
• The maximum investment amount in each financial year is Rs. 1,50,000.
• The amount invested each year is eligible for tax benefits under section 80C of the Income Tax Act, 1961.

Equity-Linked Savings Scheme (ELSS):

If you are a risk aggressive investor who also wants to save taxes along the way, the Equity Linked Savings Scheme (ELSS) may be a good option to consider. This is a kind of mutual fund investment with high exposure in equity.

Eligibility to invest

Both Indian residents and non-resident Indians (NRIs) can invest in an Equity Linked Savings Scheme (ELSS).

Salient features of ELSS

• ELSS funds have a lock-in period of 3 years.
• The minimum investment amount varies from one fund house to another.
• There is no limit on the maximum investment amount.
• ELSS portfolios mainly include equity investments. However, there is also some allocation made for fixed income securities.
• The amount invested in ELSS is eligible for deduction under section 80C of the Income Tax Act, 1961, up to Rs. 1,50,000.

Wrapping up

These savings schemes and investment options can help you put your money in instruments that will help create wealth over time. All of these investment options are relatively low risk, so they make for ideal choices for conservative investors. In addition to these investments, it’s also a prudent move to add insurance to your portfolio. And as we saw earlier in this module, insurance can be of two types - life insurance and general insurance. We’ll learn more about these types of insurance in the upcoming chapters.

A quick recap

• A fixed deposit is an investment instrument provided by banks and NBFCs. It allows investors to deposit a certain sum of money, so they can earn interest on that sum.
• The interest on FDs can be reinvested if you want it to be that way.
• Fixed deposits also give you the option of receiving a monthly payout. In that case, when you choose the monthly payout option, you’ll receive a fixed sum of interest each month, over the course of your investment period.
• You just need to approach the bank of your choice and open an FD account with them. Most banks and NBFCs even offer this facility online now, so you can book an FD from the comfort of your home.
• There are also many other savings schemes in India, like the NPS, the NSC, POMIS, SCSS and SSY.