Long-term fixed deposits (FDs) have remained one of the most preferred investment choices for Indian savers for decades. Known for their safety, guaranteed returns, and ease of use, they offer a sense of financial security, especially for those who prefer avoiding riskier investments like stocks or mutual funds.
While short-term FDs are also popular, long-term fixed deposits bring additional benefits to the table, making them a wise choice for certain types of investors.
What is a Long-Term Fixed Deposit?
A long-term fixed deposit typically refers to an FD with a maturity period that exceeds 3 years, and can go up to 10 years, depending on the bank or financial institution. The money you invest remains locked in for the specified period, and in return, you receive a predetermined rate of interest.
One of the most appealing aspects of FDs is the certainty they provide. Regardless of market fluctuations or economic conditions, the interest rate agreed upon at the time of investment remains fixed, ensuring steady returns.
Benefits of Long-Term Fixed Deposits
Stable Returns
Long-term FDs offer stable returns as the interest rate remains locked in for the entire tenure of the deposit. This means that even if interest rates in the economy fall, your FD will continue to earn at the agreed-upon rate, making it a stable and predictable investment.
Higher Interest Rates
Typically, long-term FDs offer higher interest rates compared to their short-term counterparts. This is one of the key reasons many people opt for them. Banks and financial institutions often provide slightly better rates to encourage savers to commit their money for longer durations.
Safety and Security
Unlike market-linked investments such as mutual funds or equities, fixed deposits are not influenced by stock market volatility. For risk-averse individuals, long-term FDs provide a safe and secure way to grow their savings over time. In India, deposits in banks are insured up to ₹5 Lakhs by the Deposit Insurance and Credit Guarantee Corporation (DICGC), offering an added layer of protection.
Tax Benefits on Specific FDs
For those looking to minimise their tax liabilities, certain long-term FDs, such as tax-saving fixed deposits, come with added benefits. These allow for a deduction of up to ₹1.5 Lakh under Section 80C of the Income Tax Act and have a lock-in period of 5 years. However, the interest earned on these deposits is taxable, and it is important to account for this when calculating your returns.
Encourages Disciplined Saving
Opting for a long-term FD can help cultivate a disciplined saving habit. Since the money remains locked in, it reduces the temptation to withdraw and spend, allowing the investment to grow uninterrupted. This can be particularly useful for people saving towards specific long-term financial goals, such as a child’s education or retirement.
Considerations Before Investing in a Long-Term FD
While long-term fixed deposits have many advantages, it is essential to consider a few key factors before committing to one.
Liquidity Concerns
One of the primary drawbacks of long-term FDs is the lack of liquidity. Once you lock your funds in, it becomes difficult to access them until maturity without paying a penalty. If liquidity is a concern, you might want to consider having a mix of short-term and long-term FDs or investing only a portion of your savings in long-term deposits.
Premature Withdrawal Penalties
Most banks and financial institutions charge a penalty for early withdrawal from long-term FDs. This penalty often ranges between 0.5% and 1% of the interest rate. Therefore, if you are unsure about whether you will need the funds in the near future, it’s worth reconsidering the tenure of your FD.
Inflation Impact
While long-term FDs provide stable returns, they might not always outpace inflation. If inflation rates rise significantly, the real value of the returns on your FD may diminish over time. For instance, if the inflation rate rises above the interest rate offered on your FD, your purchasing power might decrease. Thus, it’s essential to weigh the potential impact of inflation before committing large sums to a long-term FD.
Taxation of Interest
The interest earned on long-term FDs is subject to taxation under ‘Income from Other Sources.’ This can significantly reduce the overall returns, especially if you fall under a higher tax bracket.
It’s important to take this into account when estimating the net returns from your FD investment. If you’re a senior citizen, however, there are additional benefits, such as a higher exemption limit on taxable interest.
How to Maximise Returns from Long-Term FDs?
To make the most of your long-term fixed deposits, here are a few strategies to consider:
Compare Interest Rates
Before investing, compare the interest rates offered by different banks and financial institutions. Even a small difference in rates can result in significant gains over a long period. Additionally, keep an eye on special schemes offered by banks during festive seasons or financial quarters, as they sometimes offer higher rates. Calculate FD interest rates beforehand to make informed decisions.
Opt for Cumulative FDs
In cumulative FDs, the interest is compounded and paid out at the end of the tenure. This allows you to earn interest on interest, thereby maximising your returns. This can be a smart choice if you don’t need regular payouts and are looking to grow your savings more aggressively over time.
Tax-Saving FDs
If tax savings are a priority, consider investing in tax-saving FDs. However, keep in mind that these come with a lock-in period of 5 years, during which the deposit cannot be prematurely withdrawn.
Who Should Consider Long-Term FDs?
Long-term fixed deposits are ideal for individuals who:
● Prefer stable returns over riskier investments
● Are saving for long-term goals, such as a child’s education, a wedding, or retirement
● Want to minimise their tax liabilities by investing in tax-saving FDs
● Are risk-averse and prefer safety and security over higher returns
● Do not need immediate access to their funds and are comfortable locking in their money for an extended period
Conclusion
Long-term fixed deposits continue to be a smart investment choice for many Indian investors, offering safety, stable returns, and tax-saving opportunities. While they may not deliver the highest returns compared to market-linked investments, they offer peace of mind and stability, which are invaluable in today’s volatile economic environment.
Disclaimer:
CBD:
Qrius does not provide medical advice.
The Narcotic Drugs and Psychotropic Substances Act, 1985 (NDPS Act) outlaws the recreational use of cannabis products in India. CBD oil, manufactured under a license issued by the Drugs and Cosmetics Act, 1940, can be legally used in India for medicinal purposes only with a prescription, subject to specific conditions. Kindly refer to the legalities here.
The information on this website is for informational purposes only and is not a substitute for professional medical advice, diagnosis, or treatment. Always seek the advice of your physician or another qualified health provider with any questions regarding a medical condition or treatment. Never disregard professional medical advice or delay seeking it because of something you have read on this website.
Gambling:
As per the Public Gambling Act of 1867, all Indian states, except Goa, Daman, and Sikkim, prohibit gambling. Land-based casinos are legalized in Goa and Daman under the Goa, Daman and Diu Public Gambling Act 1976. In Sikkim, land-based casinos, online gambling, and e-gaming (games of chance) are legalized under the Sikkim Online Gaming (Regulation) Rules 2009. Only some Indian states have legalized online/regular lotteries, subject to state laws. Refer to the legalities here. Horse racing and betting on horse racing, including online betting, is permitted only in licensed premises in select states. Refer to the 1996 Supreme Court judgment for more information.
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