Banking 102 : Terms related to deposits
Understanding Deposit Vocabulary
Term Deposits : Literally means, the account holder commits to keep a certain amount for a certain (fixed) amount of ₹ time in the bank.
Why would the Account Holder do that?
→ The bank guarantees to give the Account Holder a higher Interest rate (then Savings Account) to the Account Holder.
Fixed & Recurring Deposit →
When an account holder places a single lump sum amount (like ₹1 lakh) into a term deposit, it is termed as a Fixed Deposit (FD).
Conversely, if the account holder deposits like ₹10,000 monthly, akin to a SIP (Systematic Investment Plan), it is referred to as a Recurring Deposit (RD).
- In Fixed Deposits (FDs), you receive interest on your principal amount at a certain interest rate. However, the Annual Percentage Rate (APR) holds greater significance than this interest rate.
According to RBI rules, all banks compound interest quarterly. That means the interest accrued on the FD in three months will start earning interest from the fourth month as well.
- If someone is investing in a substantial FD, where the annual interest exceeds ₹40,000, a 10% Tax Deducted at Source (TDS) will be deducted from that interest. However, if the individual’s taxable income falls below the taxable limit, in that specific case, by filling out Form 15G/15H and submitting it to the bank, no tax will be deducted.
- Smart Practice: Manage FDs in a way that the interest earned doesn’t exceed ₹40,000 in any bank’s FD (Check Picture for clarity).
That’s all for today, folks.
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