Planning Fixed Deposit (FD)? This trick can help you earn more, save income tax too

A large number of investors are hesitant to put their money in the equity market due to uncertainties in the finance sector. They look for safer investment avenues that offer assured income sans market risks. Fixed Deposit (FD) is arguably one of the safest investment options.

FDs have become more lucrative recently as banks have hiked interest rates. Image Source: Reuters

A large number of investors are hesitant to put their money in the equity market due to uncertainties in the finance sector. They look for safer investment avenues that offer assured income sans market risks. Fixed Deposit (FD) is arguably one of the safest investment options. It provides assured returns. By depositing in five-year tax savings scheme, you can also get rebate from the Income Tax department. However, the maximum amount on which you can get tax rebate in the five-year plan is Rs 1,50,000. You cannot invest more than this amount in the tax-saving scheme.

FDs have become more lucrative recently as banks have hiked interest rates. Some banks are even offering interest rates over 8.5% on certain plans. It is also easy to open FD account and make investment as everything, including withdrawal, can be done online.

Some FD investors tend to put their money in long-term plans of 10 years. However, interest rates offered by banks on term deposits of 5-year or less are generally higher than the 10-year plans. By investing smartly, you can make the most of the FD schemes.

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For example, suppose you plan to invest Rs 1.5 lakh for 10 years in, say, HDFC Bank's FD scheme. Here's how you returns will vary if you invest for 10 years at one go, or break it into two deposits of five years each. HDFC is currently offering 6.5% interest on FD below Rs 1 crore for 10 years, while the rate for 5-year deposit is 7.25%. At the current rate, Rs 1.5 lakh in HDFC Fixed Deposit will become Rs 285,839 upon maturity after 10 years.

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However, if you invest the same amount for five years, the bank will return Rs 214,839 upon maturity. If you reinvest the amount after five years, it will increase up to Rs 307,705 in 10 years if the interest rate remains same. This is clear here that you can get more by investing for shorter periods, instead of putting the money in long term FD of 10 years. You will also save tax on the first deposit of Rs 1.5 lakh.

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Fixed Deposits HDFC Bank