Fixed Deposits (FDs) are known for their safe and secure returns. You lock an amount at an agreed interest rate for a fixed duration and at maturity earn those predictable profits.
However, one critical decision every investor faces is selecting the right tenure for their bank deposit. This is because each duration will directly impact your overall returns and accessibility of funds.
Take a look at some useful strategies to help you make the right decision.
Align your fixed deposit with your liquidity needs
Liquidity refers to how quickly and easily you can convert your investment into cash without losing value.
If you expect to need funds shortly, opt for a shorter tenure. This way, your money is not tied up when you need it most. If you have a stable financial base and an emergency fund, you can afford to lock your funds for longer.
Check interest rate
Fixed deposit interest rates also vary based on the tenure. Generally, longer tenures attract higher FD rates compared to shorter tenures.
Evaluate the existing interest rate scenario to gauge potential fluctuations.
A rising trend in interest rates suggests that shorter tenures might be lucrative, as you can reinvest at higher rates upon maturity. During a declining interest rate scenario, opting for a longer tenure can secure higher FD rates before they decline further.
You can divide your funds across multiple FDs with different tenures (short, medium, and long-term) to hedge against interest rate changes and maintain liquidity.
Analyse inflation and actual fixed deposit returns
Longer tenures yield higher rates but increase inflation risk. It is wise to choose a fixed deposit account that offers a higher interest rate to beat inflation and preserve your funds’ purchasing power.
You can book IndusInd Bank Fixed Deposits and earn best-in-class interest rates. Moreover, you will get the following benefits:
- 100% paperless booking. Just provide your PAN and Aadhaar details
- Auto-renewal option
- Interest payout options
- Book a bank deposit of any amount with video KYC
- 5-year tax-saving FD to reduce income tax liability
You can even use the FD interest rate calculator to find out the final amount you will receive at maturity. This can help you choose a tenure that delivers the highest return possible.
Assess tax implications
Interest income from FDs is taxable according to your income tax slab. TDS is applicable if the total interest income exceeds ₹40,000 (for individuals below 60 years) and ₹50,000 (for those above 60 years) in a financial year.
Make sure to consider these tax implications of the FD tenures you choose.
You can invest in tax-saver FDs to claim tax deductions of up to ₹1.5 lakh annually under section 80C of the Income Tax Act, 1961. It has a five-year lock-in period, which means partial or premature withdrawals are not allowed.
You can even time your FD maturities strategically with years of lower tax liability to optimise your tax outgo.
Additional points to consider while choosing the right FD tenure
Check out more tips that can help you choose the right fixed deposit tenure.
- Balance liquidity with returns: Shorter tenures offer more liquidity but lower returns. Weigh your need for access to funds against the need for higher interests.
- Compounding advantage: Use an FD calculator to see how different compounding frequencies impact your deposit’s growth and choose the most profitable tenure.
- Consider emergency fund needs: If you already have an emergency fund, you can opt for a longer tenure for higher interest. If not, a shorter tenure provides quicker access to funds.
- Consider your age and life stage: Young individuals may favour longer tenures for compounding benefits, while seniors may prefer shorter tenures for more immediate access to funds.
Key takeaways
Choosing the right FD tenure is all about adopting an approach that considers your financial objectives, cash flow needs, return expectations, and tax implications. By assessing these factors and using strategies like laddering and booking tax-saving FDs, you can optimise your fixed deposit returns and maintain flexibility.
Remember the right FD tenure should balance returns and accessibility as well as support both short-term and long-term funding needs.