Spread your investment across multiple FDs with different maturity dates
Adhil Shetty of BankBazaar explains this with the help of an example: Assume you have a total investment amount of Rs 10 lakh that you want to invest in fixed deposits. You decide to divide this amount into four equal parts of Rs 2.5 lakh each. Thereafter, you can invest in fixed deposits with varying maturity periods.
FD 1- Rs 2.5 Lakh for a 1-year
FD 2: Rs 2.5 Lakh for 2 years
FD 3: Rs 2.5 Lakh for 3 years
FD 4: Rs 2.5 Lakh for 5 years
Such a strategy is also known as laddering where you can spread your fixed deposit investments across different maturities to maximise returns and maintain liquidity.
The thumb rule is – when the rates are high, go for longer tenures with your deposits. When they are low, ladder them and wait for higher returns.
The Deposit Insurance and Credit Guarantee Corporation (DICG)C provides deposit insurance of only Rs 5 lakh per account holder per bank, including principal and interest. Therefore, if someone wants to invest more than Rs 5 lakh, it’s advisable to split among multiple banks. Having multiple FDs across different banks, implies your risk is spread out evenly. Even if one bank goes bust, the impact is restricted. Moreover, investing across issuers can help you tap better interest rates too. If you choose to keep all your money in one FD with one bank, then you cannot avail special rate FDs of other banks.
3. Premature withdrawal of FDs for reinvestment can result in varius penalties
The penalties for breaking a fixed deposit before its maturity can vary depending on the terms and conditions set by the banks where the deposit is made. Here are some common penalties that may be imposed, according to -Pallav Pradyumn Narang, Partner, CNK.
1. Reduced Interest Rate: When you break a fixed deposit prematurely, the bank may lower the interest rate that was initially offered. The reduced rate is typically applied from the date of deposit until the early withdrawal date. The interest rate payable will be 1% less than the actual rate of interest applicable for the period for which the deposit has remained with the bank, prevailing as on the date when the deposit account was opened.
If you do decide to break the FD prematurely and reinvest say Rs. 30,00,000 in 5 smaller FDs to avail a higher interest rate, there are a few factors to consider.
Firstly, evaluate the interest rates offered by the new FDs you plan to invest in and compare them to the current rate of the old FD. Make sure that the potential increase in interest justifies the penalties and reduced interest earnings resulting from breaking the old FD.
Ritesh Sabharwal, a certified financial planner, explains this with an example: If you have opened a fixed deposit of Rs 1,00,000 at an interest rate of 7 per cent two years ago, and you decide to break than FD after one year, the interest rate for a 1 year FD back then was 6%, therefore when you pre-close your FD after 1 year, the bank will pay you at 6% and not 7%.
Understand the tax implications:
Pursuant to Section 194A of Income Tax Act,1961, TDS of 10% is deducted on any interest payment over Rs 40,000 made by a Banking Company, a co-operative society carrying on banking business or Post Office.
b. Threshold for Senior Citizen (i.e., Age > 60 years) shall be Rs 50,000
Narang explains this with the following example: Suppose Mr. Ram (Age 49 Years) has made a fixed deposit with ICICI Bank