One of the investment avenues that is the most preferred in India is a fixed deposit account. It comes with low risk and guaranteed returns and thus it is an ideal investment option to investors who want to be certain about their invested funds to be safe. Nevertheless, the first-time investors would often ask what could become of the fixed deposit (FD) after it has been secured. It is at the expiry of the fixed deposit account term which is determined that an investor would be required to make decisions on what to do with the matured amount including the principle and the amount of interest accrued.
This article discusses the process of this happening when a fixed deposit account is in a maturity stage and it gives information on the available options to be taken by an investor. It also looks into other details like TDS (Tax Deducted at Source) on fixed deposit interest and the most important financial considerations to consider.
What occurs during the Fixed Deposit Account Maturity?
The bank or any other financial institution that has your fixed deposit account notifies you on maturity of the FD when they mature. At maturity:
Principal and Interest Payout: At the end of the FD maturity period, the principal amount plus the amount of interest accrued on the sum is paid. As an example, when you invested 5,00,000 in 5 years with an annual interest of 6 percent, the maturity proceeds would be around 6,73,000 (5,00, 000 +1, 73,000 as interest).
Written Instructions Are Essential: It should be mentioned that written instructions are usually needed by banks on what to provide with the amount that matures. In the absence of specifications, the bank will automatically renew the FD with the same tenure but at interest rate that is prevailing.
Grace Period: Grace period of most banks is between 7 to 15 days following maturity date. In this grace period, you are allowed to withdraw the matured amount or they can be reinvested in a new FD, or transferred to another investment item. There is no penalty imposed when you do within the grace period.
Automatic Renewal: No instructions are given and the bank/financial institution can renew your FD to the same term as your deposit. But interest rate charged would be that on the date of renewal and this may not be the same interest rate that had been charged initially. Note that automatic renewals might not enable you to get maximum returns in case of drastic changes in FD rates.
What to do When Your Fixed Deposit Matures.
1. Penetrate the Maturity Amount.
An investor is able to withdraw the invested amount of money together with the interest. This alternative is mostly chosen by persons who want to access liquidity to satisfy urgent financial requirements.
2. FD Renewal
Most investors opt to roll over the amount of the maturity in a new fixed deposit of a new tenure. Renewal may optimize returns in case present interest rates of the FDs are higher than the earlier ones. There are financial institutions that have better interest rates to elderly citizens or customers renewing their FD which could be an enticing offer to them to reinvest.
3. Transfer the Funds
Depending on your financial objectives and risk-taking capabilities, you may want to move the FD maturity proceeds to a savings account or any other financial asset such as mutual funds, equity markets or insurance products.
Taxation: Interest of Fixed Deposit.
The tax implication to the interest earned is one of the aspects that should be considered after the maturity of a fixed deposit account. The interest on the fixed deposits lies completely in the tax bracket of the Indian income tax. The interest earned by the bank is subject to TDS (Tax Deducted at Source) of the interest amount more than 40,000 (50,000 to senior citizens) in a financial year.
Points to Note:
Failure to avail your PAN results in an increase in the TDS deducted to 20%.
In case your total taxable income is less than the exemption limit, you may file Form 15G or Form 15H in order to get an exemption with regard to TDS.
How To Proceed With Your Maturity.
Once your FD reaches its maturity, the question to ask yourself is; what will you do with the proceeds in the context of your total financial plan. The following are some of the situations that are usually encountered:
Emergency Fund Requirement:
The amount that has matured should be used to construct or replenish an emergency fund in the event of unexpected costs in the future.
Financial Goals:
In case you have targeted plans such as a home buy, university fees, or a retirement plan, then direct the proceeds therein.
Debt Management:
Debts such as personal loans or credit card repayments can also be paid off using the amount of the maturity to save on high-interest rates.
Diversify Your Portfolio:
Depending on the prevailing market conditions and your level of risk taking, consider other investment options, including mutual funds, gold, government bonds or insurance plans.
Notable Things to remember:
Premature Withdrawal Penalty: In case you withdraw your FD before maturity, a penalty is charged by the banks (e.g., a reduced interest rate of 0.5 per cent and 1 per cent).
FD Closure Process: It is possible to close your FD account either on the Internet or at the bank branch. Remember to take identity evidence and the FD certificate or receipt so that the process of closure is smooth.
Monitor Your FDs: To avoid lapsing grace periods or automatic renewals, it is advisable to keep on track of the tenure, interest accrued and maturity date of your FD.
Conclusion
The maturity of a fixed deposit account gives an investor a great chance to evaluate the financial objectives and determine the optimal option of handling the maturity proceeds. The investors may either withdraw their money, renew the FD, to take a new term or transfer them to other financial instruments. One should however also know the tax implications such as the TDS on fixed deposit interest income and need to factor this into a financial planning.
To make efficient decisions, make sure that you thoroughly evaluate your liquidity requirements, taxation and general financial objectives in handling the FD maturities.
Summary:
The fixed deposit account makes investment to grow safely and on a desired period of time besides providing guaranteed returns in the form of accrued interest. The investor can choose when the FD matures. These are withdrawal of the maturity proceeds, renewing of the FD with new tenure or transferring the funds to other assets. In case of absence of instructions the bank can renew the FD automatically with the tenure same and with the current interest rates.
Also, interest on the interest of fixed deposit is TDS when the received interest is higher than the set cap on interest of 40,000 (50,000 to senior citizens) during a financial year. TDS may also affect post tax returns hence investors have to consider this aspect when considering their FD options. It is imperative that investors should review their financial goals, liquidity requirements and tax obligations so that they could maximize the proceeds of their maturities.
Disclaimer:
The article is informational. The investment in the Indian financial market in terms of the fixed deposits is associated with the risks and taxes. Before investor makes any investment decision, he/she should be keen to weigh all the advantages and disadvantages or seek professional advice of a financial advisor.