Top 5 Advantages of Having a Fixed Deposit Account

Owning a car or a home is still a farfetched dream for many Indians. Investment tools like fixed deposits have been the preferred choice when it comes to long term savings toward such financial goals. FDs assure some of the highest interest rates and guaranteed returns. As of 2019, the highest rate offered was 8.50% per annum. This is a great way to accumulate wealth, taking you one step closer to fulfilling your dreams. We give you 5 reasons why investors turn to FDs so often.

1. Encourage Savings Habit

Saving often comes across as a challenging task, particularly for millennials. But in an FD account, you simply out away a certain amount for a fixed period. Doing this helps your funds grow over time, depending on the current FD rates. This keeps you away from the temptation of withdrawing your money for impulsive spending. Also, since penalties are included in case you break the FD prematurely, you are likely to refrain from doing so, unless there is a real emergency.

2. Tax Savings Avenue

With tax savings fixed deposit options, the amount of taxable income is reduced. This helps you save a substantial amount. You are eligible for deductions under 80C of the Income Tax Act, 1961, of up to ₹1.5 lakh of your taxable income if you put it away into an FD. However, there usually is a 5-year lock-in period. You cannot withdraw before the fixed tenure, but it is possible in case of the untimely death of the account holder.

3. Interest Payout Flexibility

The interest rates can be paid monthly, quarterly, half-yearly or annually, as chosen by the depositor. This is known as a non-cumulative option. The other traditional option is a cumulative option, in which the amount is paid at maturity only. To earn maximum returns, this option is more feasible. Through the power of compounding, interest is built over time, on which further interest is given. If you are looking for regular income, the non-cumulative option works better.

4. Easy Cash Withdrawal

The deposit can be broken prematurely at any given point, in exchange for a small penalty. Many banks have the option of zero penalties on early closure by senior citizens. You can cash out your investment in case of a financial crunch, such as a marriage or medical treatment. In fact, it also serves as a great cushion against emergencies like business loss or sudden accidents. All you need is valid documentation to get your money back.

5. Backed Deposit Insurance

As per the Union Budget 2020, fixed deposits now have insurance of ₹ 5 lakhs. If your bank is unable to pay your savings account, the DICGC will cover the compensation. You will get back the full amount, even if the deposit is less than the insurance cover. This makes FDs even more reliable and safe as a saving option.

Fixed deposits are ideal when it comes to regular income. It is simple to understand and not affected by market fluctuations.