A new hike has been announced by the largest lender, State Bank of India, and this time it is on fixed deposit interest rates that have seen an increase. Today, SBI hiked interest rates it offers on fixed deposits by up to 10 basis points with immediate effect. However, the new rates are applicable on deposits below Rs 1 crore. Under the revised rate structure, the deposits for 1 year to 2 years will now accrue 6.7% as against 6.65% earlier. For senior citizens, the new interest rate is 7.2% from earlier 7.15% earlier. 

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Now that SBI has made its Fixed Deposits account look attractive for citizens, one can expect other banks especially private ones to follow suit. 

It has been a pattern every time when SBI announces a hike or a cut in interest rates either be it for deposits or lending, other banks have followed in its footsteps. 

For instance this would be the third hike made by SBI in its fixed deposit rates. Last time it was in month of May when SBI hiked its FD interest rates by 25 basis point, which was followed by Axis Bank and HDFC Bank later. 

Also, on Sunday, an NBFC- Sundaram BNP Paribas Home Finance hiked its fixed deposit rates on different tenure which will be effective from August 01. The company has made as much as 50 basis point hike in their FD interest rate. 

With this, investment in Fixed Deposits look very attractive for any common man. Investing in FD is more like a traditional way of investment for any family in India. You must have heard it your senior or parents guiding you open a fixed deposits of your own. 

Fixed deposit’s safety of principal and assured cash flows makes it an attractive option. This is suitable for investors who are light risk taker when it comes to their hard-earned money. 

Why does a bank hike interest rates? 

There are many reasons why a bank decides to hike FD rates. One common move is that a bank wants to increase deposits. It needs to be noted that, credit and FD rates are conversely related. 

When credit demand is low, banks generally reduce their deposit rates because they are not in need of funds also other reason is to avoid surplus liquidity.

Therefore, when credit demand is high, banks hike their FD rates in order to avail funds in the form of deposits to increase their lending capacity. 

According to latest RBI data, bank credit growth came in at 12.84% valuing Rs 86,16,408 crore in the fortnight ending June 22. This is way higher compared to the number of Rs 76,35,689 crore in the similar period a year ago. 

Meanwhile, in the same fortnight, bank deposits managed to grow on  a single-digit of 7.59% to Rs 113,53,525 crore as against Rs 105,51,910 crore a year ago same period. 

Hence, banks are making their FD look attractive for investors in order to increase their deposits for enhancing their credit growth which will help them recover in return stressed asset issue in making higher provisions. One needs to remember loan is a main source of income for banks. 

What can you do? 

Though FDs look a very comfortable form of investment and now with hike in interest rate this surely make consumers even more confident in parking their money in this pool. However, before doing so you might want to remember these pointers. 

Firstly, investors pay tax on their FD as per their slab rate and have TDS deducted. Also if you hold your FD account for more than 5 years, then you are eligible for tax benefit under section 80C of the IT Act. One can save up to Rs 1.5 lakh tax benefit under this section for investment in FD. 

Going ahead, banks determine the rate of interest rate which levy on your FD account. Also, only individuals and Hindu Undivided Families can invest in this tax-saving FD. 

The time duration for FD can be selected by you. The bank offers time period of holding an FD account from lowest 7 days to as much as to 5 years. 

Just like most investment, one also have to maintain a minimum amount which you need to invest in a FD deposits. For starting the amount can be as low as Rs 500 but the criteria varies from bank to bank. 

If you break your FD in times of need before the due date, than you would not get the entire benefit, also there will be some penalties as well on your account. 

 

Once the interest rate exceed Rs 10,000, then a TDS is available for you on FD. Also, your bank may deduct TDS before paying interest on your FD. However, if a TDS is lower than your personal tax rate, then you are eligible to pay interest on the FD when you file your tax returns. 

Further, having a tax-saving fixed deposits does not mean you are eligible for having loans, banks usually don’t allow borrowing for such account. 

Considering the above, three things one should remember TDS, tenure and interest rate amount while having a FD account. 

But if you can take slightly higher risk there are investment pools which are without TDS deductions on gains. 

One can opt for non-convertible debenture (NCD) as they are considered as dark horse because they started delivering smaller but steady returns over time.

Just like traditional FDs, NCD is also a fixed-income investment with a specific term and interest income. What generally happens is, companies issue them to raise funds, and evidently you cannot convert it to equities. For making up to this limitation, investors enjoy supreme returns, liquidity, low risk and tax respite as opposed to convertible debentures.

Generally, NCDs give you return in the range of 9% to as much as 12%, compared to corporate FDs, bank FDs and Government bonds which is maximum up to 8%. 

NCDs are not insured but they are considered secured againts a company’s assets. Transactions is allowed on stock exchanges. NCDs are available in 6 options with a tenure of 38 months, 60 months and 120 months. Minimum Rs 10,000 investment is a must.

Also there are TDS required for registered NCDs and can be traded but not removed prematurely. Further, because it is linked with market which are sentiment driven, it usually carries higher risk but best returns. There is a saying with higher risk comes higher return and is one big mantra when it comes to trading in market-linked investment tools.