Odd tenure FDs are offering higher than normal interest rates: 5 things to know before investing If your risk appetite is low and fixed deposits are your instrument of choice, then opting for odd tenure deposits might make sense
Banks have been hiking fixed deposit rates in line with rise in the repo rate. Some banks have gone a step ahead and announced odd tenure deposits that are offering higher than normal interest rates. The news gets even better as several small finance banks are luring customers with high interest rates as well. However, before you decide to invest in such deposits, do keep the following points in mind.Tenure must match horizon
Experts say one must choose an investment vehicle as per their mandate and time horizon. If your risk appetite is low and fixed deposits are your instrument of choice, then opting for odd tenure deposits might make sense. These will give higher interest rates than deposits with regular tenures of 1, 2 or 3 years and could also suit the time frame required to meet your goals. For example, DBS Bank is offering an interest rate of 7.25% on a fixed deposit of 600 days (1 year 7 months) tenure but is giving 6.5% interest on 601 days to 2-year tenures. Axis Bank is offering 7.26% on a 2-year to less than 30 months deposit, but is giving 7% interest on 30 months to less than 3 years tenures.
Spread money across tenures
While odd-tenure fixed deposits give a better interest rate, most of these are non-callable— these cannot be broken prematurely. Normal FDs may be offering lower interest, they do offer the option for premature withdrawal, but with penalties. To make the best possible use of the given situation, experts suggest dividing up the FD amounts between special and normal types of deposits. Spread money across short tenure fixed deposits in multiple banks. The investments in shorter tenure normal FDs will provide liquidity in case of emergencies, while the special tenure FDs will give superior interest. In addition, this practice would help eliminate concentration risk with a particular bank since the Deposit Insurance and Credit Guarantee Corporation allows a claim limit of Rs 5 lakh per depositor per bank.
Some of the fixed deposits cannot be broken prematurely
Don’t go all in
The RBI hikes its repo rates to keep inflation under control. Experts believe that in the next RBI monetary policy meeting, repo rates could be hiked by up to 25 basis points and this may lead to hike in FD rates too. This would also mean good news for bank FD investors. So instead of deploying all available surplus right now, some funds should be set aside for making fixed deposit investments after the rate hike to enjoy a slight tactical advantage.
Invest in parents’ name
If one’s parents are senior citizens, then making a FD in their name will provide the dual benefit of a higher interest rate and tax efficiency. Some of the tax benefits which a senior citizen enjoys include a higher interest exemption under Section 80TTB, enhanced TDS limit up to Rs 50,000 and exemption from advance tax payment if there is no income they earn from business or profession. Gautam Sahni, Partner, Vesta Legal, a Mumbai-based law firm, says one should execute a gift deed with senior parent(s) while entering into such transactions. “It would be both prudent and advisable to execute one in order to avoid any unwarranted scrutiny,” he says. This would also prevent any dispute over who the maturity proceeds should go to in the event of the FD holder’s death.
Invest in name of adult kids
If you have an adult dependent child who might be studying now or is earning a lower income than you, then it might be a good idea to invest in their name. This will help in lowering your tax outgo on the interest income. However, this will also make the adult child the rightful owner of the fixed deposit money. Abhishek Y. Bhavsar, an Ahmedabad-based chartered accountant, says the solution is to open an FD in the joint name of the parent and adult child, where the primary holder is the parent. This way the primary holder has control over the deposit, and any changes in the deposit would require approval from all the joint holders.
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This story originally appeared on: India Times - Author:Faqs of Insurances
