Ways to Obtain Higher Returns from Fixed Deposits

Fixed or time deposits continue to remain one of the most trusted and popular investment vehicles. This is primarily because such deposits are risk-free and provide guaranteed returns.

Interest rates have seen a marginal increase during the last few years. Therefore, the returns on such deposits have remained almost stagnant. Nonetheless, here are six strategies you may use to earn higher returns on such deposits.

Research different available options

You must research the fixed deposit interest rates and tenures offered by different institutions. In addition to banks, Non-Banking Financial Companies (NBFCs) offer such deposits and checking the available options will help maximize your returns.

Some institutions offer a higher rate of interest if you open the fixed deposit (FD) online. With net banking and online account opening features, choosing an FD through digital meansis quite easy. You may also choose to invest in company deposits, which offer a higher interest rate when compared to the banks. If you invest in company deposits, it is recommended that you choose deposits that have a higher credit rating to reduce your risk.

Determine the interest rate calculation frequency

Investing in the highest FD interest ratesis the basis of maximizing returns. However, you must not overlook the importance of the frequency of the interest rate calculation. The interest on FDs is calculated quarterly, bi-annually, or annually. When the interest is calculated multiple times during the year, you are able to increase returns through the compounding effect.

Reduce tax deducted at source (TDS)

Another method to increase the effective FD rates is to reduce the TDS. 10% TDS is levied if the interest earned on the FD exceeds INR 40,000 per year. To avoid TDS, it is recommended that you split your FDs into smaller amounts ensuring the annual interest on each deposit is within the maximum limit. Additionally, if your annual income is less than the minimum tax exempted amount, you must submit form 15G and 15H to ensure TDS is not levied, which helps increase the returns on deposits.

In addition to increasing the effective returns, investing smaller amounts in FDs has another advantage. In case you need emergency funds, you may break only one FD while ensuring you continue earning returns on the other deposits.

Opt for cumulative FDs

Cumulative FDs generally offer compounding interest on the deposit amount. If the interest is calculated every quarter, this income is added to the original principal deposit to help you earn higher returns.

Invest interest earnings in higher return instruments

If you are willing to take some risk on the interest earned on the FD, you may invest the same in higher-yielding options, such as a systematic investment plan in an equity-linked mutual fund. This allows you to earn higher effective returns on your principal investment.

Do not withdraw the FD prematurely

When you invest in time deposits, you do not want to withdraw the money before its maturity date. However, there may be an emergency and you may need immediate funds. If you have a large amount invested in FDs, the institution may offer an alternative like an overdraft facility. You may also consider opting for a loan against the FDs. Premature withdrawal entails a penalty, which reduces the effective interest on the deposit.

Several institutions offer higher FD rates in India if the deposit is in the name of a senior citizen. You may consider investing in your parents’ names to earn higher interest on the FDs.

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