Fixed Deposits (FDs) have long been a preferred savings tool for many investors in India. Their popularity stems from their safety, guaranteed returns, and simplicity. Among the various features and benefits of FDs, the interest payout option plays a crucial role in determining the overall return and liquidity for the investor.
Understanding Fixed Deposits
Before exploring the interest payout options, it’s important to understand the basic concept of Fixed Deposits. An FD is a financial instrument provided by banks and Non-Banking Financial Companies (NBFCs). You deposit a lump sum amount for a fixed tenor at a predetermined interest rate. The interest rate is fixed for the entire duration, providing a clear picture of the returns you will earn.
Types of Interest Payout Options
Interest payout options in FDs primarily come in two forms: cumulative and non-cumulative. Let’s explore these in detail.
Cumulative Fixed Deposits
In cumulative FDs, the interest is compounded quarterly, half-yearly, or yearly and paid out at the end of the maturity period. This means you do not receive periodic interest payments; instead, the interest accumulates and is paid out along with the principal at maturity. This option is suitable for investors who do not require regular income and prefer to maximise their returns through compounding.
Non-Cumulative Fixed Deposits
Non-cumulative FDs, on the other hand, pay out the interest at regular intervals – monthly, quarterly, half-yearly, or annually. This option provides liquidity in the form of regular interest payments, making it ideal for those who need a steady income stream.
Monthly Payout FD: A Closer Look
Among non-cumulative FDs, the monthly payout FD is particularly popular. As the name suggests, in a monthly payout FD, the interest earned is disbursed to the investor every month. This could be especially beneficial for retirees or individuals seeking regular income to manage monthly expenses.
How Does Monthly Payout FD Work?
When you invest in a monthly payout FD, the interest is calculated on the principal amount and paid out at the end of each month. For instance, if you have invested ₹10 Lakhs in a monthly payout FD for 1 year with an interest rate of 6.7% p.a., you will receive ₹5,583/- as interest every month.
Advantages of Monthly Payout FDs
Regular Income
The primary advantage of a monthly payout FD is the regular income it provides. This can be particularly useful for meeting recurring expenses, such as household costs, medical bills, or other financial commitments.
Stable Returns
Monthly payout FDs offer stable and predictable returns, as the interest rate is fixed for the tenor. This helps in financial planning and budgeting.
Safety and Security
FDs issued by banks are considered one of the safest investment options, as they are backed by the Deposit Insurance and Credit Guarantee Corporation up to ₹5 Lakhs per depositor for each bank.
Easy to Manage
Monthly payout FDs are simple to manage, as the interest is automatically credited to your savings account every month.
Monthly Interest on ₹1 Crore FD
For high-net-worth individuals, investing a large sum such as ₹1 crore in a monthly payout FD can be an attractive option. Let’s break down the potential returns.
Assuming an interest rate of 6.7% p.a., the monthly interest on ₹1 crore FD would be calculated as follows:
Principal Amount: ₹1,00,00,000/-
Tenor: 1 year
Annual Interest Rate: 6.7% p.a.
Monthly Interest: ₹1,00,00,000 x 67% / 12 = ₹55,833/-
Thus, by investing ₹1 Crore in a monthly payout FD at an interest rate of 6.7% p.a., you would receive a monthly interest payout of ₹55,833/-. This regular income can significantly contribute to maintaining a comfortable lifestyle without dipping into the fixed deposit.
Tax Implications
It’s important to note that the interest earned on FDs is subject to tax under the Income Tax Act, 1961. The interest income is added to your total income and taxed as per your applicable income tax slab. Individuals earning more than ₹40,000 on the interest earned from FDs then they are liable to pay 10% as TDS. For senior citizens, there is a higher exemption limit under Section 80TTB of the Income Tax Act, 1961, which allows a deduction of up to ₹50,000 on the interest income from FDs.
Choosing the Right Tenor
The tenor of an FD can range from a few days to several years. When choosing a monthly payout FD, it’s crucial to select a tenor that aligns with your financial goals. Short-term FDs offer liquidity but typically come with lower interest rates. Long-term FDs, on the other hand, lock in your funds for a longer period but usually offer higher interest rates.
Factors to Consider
When opting for a monthly payout FD, consider the following factors:
Interest Rate
Compare the interest rates offered by different banks and NBFCs. Even a slight difference in the rate can impact your overall returns.
Tenor
Choose a tenor that matches your financial needs. Longer tenors generally offer higher interest rates but reduce liquidity.
Premature Withdrawal
Check the terms for premature withdrawal. Some FDs may levy a penalty for early withdrawal, which can affect your returns.
Reinvestment Options
If you do not need the monthly interest for expenses, consider reinvesting it in another FD or savings tool to maximise your returns.
The interest payout option in Fixed Deposits is a significant feature that can influence your investment decision. Monthly payout FDs are particularly beneficial for those seeking a regular income stream, offering both stability and convenience. By understanding how interest payouts work and considering your financial goals, you can make an informed decision and optimise the benefits of your FD investment.
Whether you’re planning for retirement or are looking to supplement your monthly income, FDs with flexible interest payout options provide a versatile and reliable solution. Always compare rates, assess the tax implications, and choose a tenor that aligns with your financial objectives to make the most of your Fixed Deposit investment.
