Several Banks, including the State Bank of India (SBI), Axis Bank, and DCB Bank, have raised their fixed deposit (FD) interest rates after the repo rate hike by the Reserve Bank of India (RBI).
FDs have become attractive due to rising interest rates and their low risks. If you have invested in FDs or plan to invest in them, here are some things to consider in light of rising interest rates.
Check If Auto-renewal Is Enabled
You may benefit from the automatic renewal option provided by your bank if you cannot track all your fixed deposits across multiple accounts due to a busy schedule. Banks will automatically renew your deposit at the prevailing higher rates, but it will be renewed for the same tenure as your previous deposit. However, depending on the bank you invested in, a different term may have offered a better return.
For instance, if you have one year FD, the auto-renewal option will renew it for one year, which offers 6.80 per cent, while FD tenure above two years and less than three years offers seven per cent. In this scenario, if liquidity is not the option, you can renew your FD for a longer tenure to avail of higher rates.
Alternatives For Auto-Renewal
Instead of opting for auto-renewal, depositors can use an app or calendar on their smartphone to remind them to renew their FDs. Furthermore, most banks send SMS notifications to their customers when their deposits mature. Senior citizens can note the maturity date in a diary or set a reminder on a calendar, then switch their deposits to another tenure or bank that offers the best interest rate.
Having your fixed deposit account is much easier in a bank that holds your savings account. The depositor can choose the FD maturity amount to be credited to their savings account. Thus you can avoid your money sitting in an FD account for too long and reinvest it after considering the rates offered by competitors.
Get A Better Deal By Waiting
Generally, banks offer a higher premium to senior citizens. For instance, SBI runs the SBI Wecare scheme for seniors, providing up to eight per cent interest rate on long-term deposits. In addition, small finance banks are offering higher rates to seniors.
Consequently, if you are just two or three years short of turning 60, it may be better for you to avoid making long-term fixed deposits that lock your money. Instead, consider alternative investment options until you reach the age of 60, and then invest in FD for senior citizens that gives better interest rates.
Read Premature Withdrawal Clauses Carefully
You will be penalized if you close or withdraw a fixed deposit prematurely. Therefore, if you plan to open an FD account, it is advisable to check the rules concerning premature withdrawals and compare the penalty charges levied by different banks.
Submit Your Form 15G or 15H Timely
FD interest is fully taxable, and the bank will deduct TDS if the interest earned in a financial year exceeds Rs. 10,000. So, submit your Form 15G or Form 15H timely in the bank to avoid a TDS deduction.
Be Mindful Of Your Liquidity At All Times
To meet your financial goal, learn if the rates are compounded quarterly or monthly before investing. You can maintain cash liquidity for personal needs with Fixed Deposit Laddering. Divide a lump sum investment into smaller deposits that mature at different times instead of investing all of your money in a long-term FD.
In this way, you can maintain liquidity when, for example, one deposit matures in a year and another in the following year. In the absence of an emergency, you may reinvest the money for a longer period.
