Fixed deposits (FDs) are a common savings option in India. With an FD, you deposit a specific amount with the bank for a set period. During this time, the bank pays interest on the amount, which is either disbursed at regular intervals or upon maturity, depending on the type of FD chosen.

There are two main types of FDs:

1. Cumulative FDs

In this type, the interest earned is paid at the end of the deposit term, meaning you receive both the principal and the accumulated interest together when the FD matures.

2. Non-cumulative FDs

Here, interest is paid out at regular intervals, such as monthly, quarterly, or annually, providing periodic income throughout the term of the FD.

We’ll focus on non-cumulative FDs with monthly payouts in this article.

How Do Monthly Payouts Work?

Monthly payout FDs give you a regular income from your savings. Here’s how they work:

1. You deposit a lump sum for a fixed term
2. The bank calculates interest monthly
3. You receive this interest in your account each month

This setup can be helpful if you need a steady income, like for retirement or regular expenses.

Calculating Monthly Returns

To understand your potential returns, let’s look at how banks calculate monthly interest:

1. They start with the annual interest rate
2. They divide this rate by 12 to get the monthly rate
3. They apply this rate to your deposit amount

Let’s see an example:

• Say you deposit ₹1,00,000 for one year at 6% annual interest
• Monthly interest rate = 6% ÷ 12 = 0.5% Monthly interest = ₹1,00,000 × 0.5% = ₹500
• So, you’d receive ₹500 each month from this FD

Remember, this is a simple calculation. Actual returns may vary slightly due to compounding effects and bank policies.

Understanding Interest Rates

Interest rates play a crucial role in determining the returns on your fixed deposit (FD). Here are some key points to keep in mind:

• Rates vary between institutions

Different banks and financial institutions offer varying interest rates for FDs, so it’s important to compare options before making a decision.

• Longer terms may offer higher rates

FDs with longer maturity periods often come with higher interest rates, but it’s important to assess whether you’re comfortable locking in your money for an extended time.

• Senior citizens receive different rates

In many cases, individuals above a certain age are eligible for higher interest rates, typically ranging from 0.25% to 0.5% more than standard rates.

• Interest rates fluctuate over time

Rates can change based on factors such as economic conditions, inflation, and policies set by the Reserve Bank of India (RBI). Monitoring these trends can help you choose the right time to invest.

While FD interest rates commonly range from 8% to 9.40% per annum, it’s essential to check current rates when planning to invest, as they may vary.

Choosing the Right FD

To pick the best FD for your needs:

1. Compare interest rates from different banks
2. Consider the tenure that suits your financial goals
3. Check if you qualify for any special rates (like senior citizen rates)
4. Look at the bank’s reputation and stability

Remember, higher rates aren’t always better if they come with added risk.

Tax Implications

It’s important to understand how taxes affect your FD returns:

1. Interest earned is taxable as income
2. Banks deduct TDS (Tax Deducted at Source) if your interest exceeds ₹40,000 in a financial year (₹50,000 for senior citizens)
3. If you’re in a low tax bracket, you can submit Form 15G/15H to avoid TDS

Always consult a tax professional for advice on your specific situation.

Premature Withdrawal

Life can be unpredictable. You might need your money before the FD matures. Here’s what to keep in mind.

1. Most banks allow premature withdrawals
2. You might face a penalty, typically 0.5% to 1% of the interest rate
3. The interest rate might drop to that of a shorter tenure

Before opening an FD, understand the bank’s premature withdrawal policy.

Is a Monthly Payout FD Right for You?

Monthly payout FDs can be a good choice if:

1. You need regular income from your savings
2. You want a low-risk investment option
3. You prefer predictable returns over potentially higher but variable returns

However, they might not be ideal if:

1. You’re looking for high growth on your investment
2. You don’t need regular payouts and can reinvest the interest
3. You’re in a high tax bracket (as interest is taxed as income)

Final Thoughts

FDs with monthly payouts offer a stable way to generate regular income from your savings. They’re simple to understand and carry low risk. However, returns are typically moderate, and inflation can eat into your real earnings over time.

Before investing, calculate your potential returns, understand the interest rates on offer, and consider your tax situation. Remember, diversifying your investments across different options often leads to a more balanced financial portfolio.

Bajaj Markets, a financial marketplace, offer a range of products. This can be beneficial for those looking to explore investment options. It provides the tools and resources to help you make informed investment decisions. This is whether you are interested in a fixed deposit or a balanced fund

Disclaimer: This article contains sponsored marketing content. It is intended for promotional purposes and should not be considered as an endorsement or recommendation by our website. Readers are encouraged to conduct their own research and exercise their own judgment before making any decisions based on the information provided in this article.