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Tax Planning through Bank Fixed Deposits

This erstwhile plain vanilla product has been made attractive by banks through bundled deals and flexible options

Fixed deposits (FDs) have always been an integral part of every investor's portfolio, simply because they give an assured rate of return. And traditionally, FDs have been plain vanilla products. However, in this era of fierce competition, banks have started introducing packaged deals to attract investors. Here are some interesting deals available in the market:

Insurance: Some FDs come with insurance. In this case, the core product remains the same with an additional benefit. But these schemes depend on the deposit amount and tenure.

For instance, a bank may give free accident insurance cover worth Rs 5 lakh on a 3-year deposit of Rs 25,000 carrying an annual interest of 8 per cent. This directly increases the value of the product.

Most banks provide accident insurance only. The sum assured ranges between Rs 3 lakh and 7 lakh. However, it is likely that the accident cover will come with a lot of clauses. Importantly, such bundled policies should not be a part of your overall insurance needs.

Floating rate deposit and reinvestment of interest: Most FDs are given at fixed rates for the specified time period. But some banks and nonbanking finance companies (NBFCs) have deposits where the interest rate is floating in nature. For instance, HDFC has a floating rate deposit where the interest rate is declared every quarter.

Another facility some banks offer is reinvestment of interest amount at the prevalent rates. Let us say you are earning Rs 2,000 interest every quarter. The bank will start a new FD with this amount at the prevailing rates.

No penalty: FDs are meant for a certain period of time. At the same time, if the depositor withdraws before the maturity, the institution levies apenalty. In such a case, the overall return suffers. For example, if a three-year deposit at the rate of 8 per cent is broken after one year, the rate available could come down to as low as 5 per cent.

However, some banks have launched products that do not reduce the rate of interest if the FD is broken in the interim. For investors who are seeking flexibility, such deposits can come quite handy.

Time period flexibility: Many of us take an FD for aparticular goal. It could be anything from purchase of an expensive item to child's marriage. There could be a possibility that these plans are postponed and the depositor might need to extend the tenure of his/her investment. One option in such a case is to wait for the deposit to mature and then reinvest it. But there cannot be surety of interest rate in the future. There are banks that have started providing FDs that allow investor to increase the time period of investment without major changes in other conditions.

Adding and breaking deposits: FDs can lead to a large amount of paperwork if a person makes multiple deposits of smaller denominations. This is usually done by investors who require money at various stages in future. They do not want to deposit everything in bulk and then break the deposit.

Banks have introduced products where a bulk deposit is divided into deposits of smaller denominations according to the investor's needs.

Such deposits ensure a higher earning benefit. At the same time, there could be a facility to add investments easily so that administration does not become a very difficult task.

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