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How Government Banks are Using Your FDs to Earn Higher Returns



Oct 18, 2022

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How Government Banks are Using Your FDs to Earn Higher Returns

How Government Banks are Using Your FDs to Earn Higher Returns

Take a tour of the content to learn about the revealed secret. Make sure you read the complete content to gather relevant information and take informed investment decisions.
Let us understand Fixed Deposits in detail. Know everything about fixed deposits, returns, tax implications, liquidity, risks, etc.

Fixed Deposits (FDs) - Overview

A Fixed Deposit is an investment instrument facilitated by banks and non-banking financial companies. It allows investors to park their surplus money for a fixed tenure against a fixed annual interest. The accumulated interest is paid back to the investors along with the principal at the end date of maturity.
Return and Tax Implications on FDs
You get interest rate ranging between 3% to 5.25% subject to tenure, amount, and bank type. This return further reduces due to tax implications. The interest you earn on fixed deposits under the provision of the Income Tax Act, 1961 is added under the head “Income from other sources” in your Income Tax Return. The interest income is taxed at the rate applicable to you.
For example,
Your bank will deduct a TDS of 10% if interest income on your FD in a financial year exceeds Rs. 10,000 subjects to submission of your PAN card/details. The tax applicable is 20% if PAN is not submitted with the bank. If you earn Rs. 30,000 as interest income within the chosen FD tenure, you will have to pay Rs. 3000 as TDS.

Do you know why banks encourage investors to invest in bank FDs?

Why does banks promote fixed deposits?
  • >   Financial institutions like bank have to pay you low rate of interest.
  • >   The interest is not paid to you periodically, so banks do not have the liability to invest manpower to manage periodic returns.
  • >   Banks get to use the fixed deposits amount for a specific tenure in more productive investment options.
  • >   Banks have to offer a nominal annual interest on FDs ranging between 3% to 5.25% to regular Indian investors & between 3.4% to 5.75% to senior citizens.
  • >   Fixed deposits (FDs) help banks reinvest the amount in higher yielding products like corporate bonds, government bonds, and other fixed income securities.

    Know the Secret of Banks
    We take the example of (State Bank of India) SBI, the leading public sector bank in India.
    Let us compare the returns of 2 different products of the same bank known to be secure investment option.
    A. Product 1 – SBI Fixed Deposits (FDs)
    SBI offers FD interest rates of 2.90% - 6.10% p.a. to the general public and 3.40% -6.60% p.a. to senior citizens for tenures ranging from 7 days to 10 years. The interest rates of SBI Tax Saving FDs are 5.65% p.a. for the general public and 6.45% p.a. for senior citizen depositors.
    B. Product 2 – SBI Bonds
    What is the rate of interest for SBI Bond?
    State Bank of India 7 to 9.95%
    What Banks do with your fixed deposits?
    The money that you invest in bank fixed deposits is used by the bank to generate higher returns.


    Now the important thing to note here is that the same bank SBI has two different products available for investors – First product above is the Bank FD offering annual interest ranging between 2.90% - 6.10%. The second product is the SBI Bonds that is offering a fixed annual interest upto 9.95%.
    In the above two different investment options, the bank pays the maximum interest upto 10% annually. The Bank invests the money of FD customers in the fixed income securities, to buy Bonds that offers higher return ranging between 7 to 14% along with the advantage of low risk, liquidity, and flexibility of tenure.
    You can witness that the interest earned by the SBI bank here is much more than the interest paid to FD investors and to the investors buying the SBI issued bonds. Thus, the Bank here uses your amount in fixed deposits to only earn money to pay back the agreed interest to you but also earns profit for the bank.

    Ask yourself the question – Why not invest directly in SBI bonds instead of investing in the SBI fixed deposits?

  • >   Why not invest in SBI Bonds giving higher returns than the bank FD.
  • >   Both the products are offered by the bank and are a fixed income security product.
  • >   Your investment in both the option is safe. Infact your capital in bonds is more safe than fixed deposits.
  • >   The capital in FDs is covered to an amount up to 5 lakhs by an insurance company.
  • >   The risk of capital loss in bonds is minimal.
  • >   If you choose to invest in government bonds or corporate bonds having AAA rating , you are at no to minimal risk.
  • >   Your capital in government bonds is protected by sovereign guarantee and backed by the government of India.
    Also, Fixed Deposits and Bonds if compared, you will find

  • >   Bonds more secure
  • >   Multiple bond type to choose
  • >   Option to choose from short-term and long-term bonds
  • >   Return can be availed at varied intervals including monthly, quarterly, half-yearly or yearly
  • >   Liquidity allows you to sell bond in the secondary market
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  • About the Saving Habit in Indians & The Investment Avenue FD

    Indians have a very good habit of saving. They believe in keeping a part of their income aside. Housewives generally keep their balance or small savings in piggybanks. Once they are able to save a minimum amount required for fixed deposit in a bank, they visit their home branch and open a FD account. The common investors are actually not aware of advantages and disadvantages of FDs.
    The retail investors do not know that there are many other options in the fixed income category that are known to provide higher interest than FDs, more security, liquidity, and benefits. The regulating bodies in India are trying to educate investors by different means of communication, advertisements, and promotional activities.

    Why Disciplined Saving is Crucial?

    Developing the habit to regularly save a bit from your monthly earning is a very good achievement. The way you need to follow good lifestyle to stay fit, eat balanced diet, similarly you need to save regularly to build fund for different needs. This habit of disciplined saving proves to be a big surprise when you get back the big, accumulated money with interest at many times compounded annually.


    1. Where do the retail investors in India generally invest?
    The answer is fixed deposits (FDs). Yes, most of the citizens in India prefer opening a FD with a bank or NBFCs.
    2. Why people in India do not think beyond FDs?
    People do not think beyond FDs. There are many reasons for it. The retail investors trust fixed deposits more than other options due to lack of awareness and knowledge. The other investment options are not promoted the way FDs are promoted by the different financial institutions in India.
    3. Which investment options can help you earn higher returns?
    There are a few options that can provide you higher returns on your investments. But if you are looking for a fixed return, stable return, and periodic income, investing in fixed income securities is the right choice.
    BONDS are a popular investment product in the fixed income securities that is known to offer interest (coupon rate) ranging between 8 to 14% annually. In comparison to other financial instruments available in the market, Bonds are considered superior. There are many advantages Bonds provide to the investors in retail and institutional segment.
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