All about FD

Questions regarding FDs rather than getting into the merits of FD VS shares VS mutual funds Vs ULIPs

A FD is a time deposit i.e. you enter into a contract to keep money for a specific period of time in lieu of interest. Most banks allow premature withdrawal of FDs but it is not a rule. FDs of some companies may not allow premature withdrawal.

Currently most banks do not charge any penalty for premature withdrawal. However the interest rate applicable is reset to the time period from deposit till withdrawal. You have the choice of reinvesting interest, withdrawing monthly interest, withdrawing quarterly interest. Generally quarterly interest rate would be marginally higher than monthly interest rate.

A separate set of FDs for a period of 5+ years are available which provide tax exemptions under section 80C. But these FDs cannot be withdrawn prematurely.

Generally bank FDs will fetch higher interest rate than postal FDs. In case of banks too, the rates vary.. Check out individual banks. Bigger banks like SBI pay a lower interest rate because of lower risks. Cooperative banks would generally pay higher interest rates because of higher risks. However FDs up to 1 lakh in cooperative banks (cumulative) are insured and hence even if a cooperative bank goes belly up, you would get back your money. Some banks have higher interest rate for specific tenures (e.g. ICIC/ HDFC for 390 days/ 580 days).

Interest on FDs is taxable

Switching FDs from one branch to another is as per bank policies. Different banks will have different policies. However you can link you FD to a savings bank account to avoid hassles. Interest as well as initial amount will be directly credited to the savings account. Private banks like HDFC, ICICI, IDBI allow operating FDs through internet banking.

Normally the flexible FD schemes of banks will carry a lower interest rate.

You can make an FD in you son's name as minor with yourself as a guardian. However the interest on such an FD will be included in the parent's income for taxation.

The PPF account is opened for 15 years compulsorily. You have to deposit a nominal amount (Rs.75) at least once in a financial year (Apr-Mar) and can deposit a maximum of Rs.. 70000 in a financial year. The interest rate currently 8% and this interest is tax free. Plus deposits to PPF are deductible under sec 80C. You can withdraw money partially from the 5th year onwards, there are policies regarding withdrawal.

Lastly, although shares provide liquidity, you have to take the price prevailing in the market at the time of your need. In some situations, you might be forced to sell at a loss because you need money. Thus money invested in shares should not be treated as contingency money..