Investors of all ages and risk appetites favour fixed deposit as an investment because they’re easy to manage, and are not linked to the market forces.

This makes them significantly more reliable, as compared to investment options, impacted by swinging stock indices or fluctuating economic conditions.

Hence, instead of investing all your savings in high-risk investment options, you must diversify your investment portfolio. For those looking for stability, investing a portion of your savings in fixed deposits is a smart choice. When choosing the right financier for investing, you may want to consider interest rates, which determine the amount of your earnings.

Read on to understand how interest rates affect the yield on your investment, how to calculate your returns and how these returns will be taxed, so you can decide exactly what portion of your corpus, should you invest in FD.

What is the interest rate on offer?

First and foremost, it’s important to remember that the interest rate that you can enjoy depends on the type of financial institution that you opt for. Fixed deposits are issued by companies, banks, post offices and NBFCs, so make your choice wisely. While a bank FD will offer you around 7.50% interest, an NBFC offers you a significantly higher interest rate, around the 8.50% mark.

For instance, investing in a Bajaj Finance Fixed Deposit yields interest amounting to 8.75% when you hold an FD for at least 36 months, with payout at maturity. A senior citizen with a similar FD can get 9.10% as interest. In addition, renewing an FD offers an extra 0.25% interest.

How you can receive interest on your FD

Fixed deposits are flexible in the sense that they allow you to decide how you want to receive the money that’s due to you. You can either opt to receive the entire amount at maturity, along with the principal invested, or throughout the tenor, in parts. Best of all, you can also decide the frequency at which you wish to receive payouts in case of the latter.

For instance, Bajaj Finance allows you to choose between monthly, quarterly, half-yearly and yearly payouts. This nifty feature allows you to tweak your investment to align with your goals. Choose maturity at payout if you want to focus on wealth creation and would like to enjoy the benefits of compounding, or pick payouts at regular intervals if your goal is to supplement your income.

How to calculate your FD interest

To make a smart investment decision, most issuers including Bajaj Finance offer a fixed deposit interest calculator online. This tool allows you to feed in parameters such as type of payout, tenor, interest rate and investment amount, and determine in seconds the amount you’ll earn on maturity. Not only does this give you a clear picture of how much you stand to gain, it also allows you to compare various FDs in the market to find the best one in minutes.

What is the tax treatment of your FD investment?

While a 5-year tax-saving FD allows you to get a tax break of up to Rs. 1.5 lakh under Section 80C of the Income Tax Act, all other fixed deposits don’t offer this perk on the amount you invest. In fact, income earned from your FD investment is fully taxable. TDS is applicable on your interest income from a bank or post office FD if it exceeds the threshold of Rs. 40,000 or Rs. 50,000 if you’re a senior citizen. Prior to the Interim Budget of 2019, this threshold stood at Rs.10,000.

For all other FDs, the issuer will deduct tax at source at the rate of 10% or 20% (if you don’t submit your PAN details to the issuer), if your interest earnings cross Rs.5,000 in a year. The only way you can prevent this from happening is if your total income, including interest from FDs, is lower than the taxable slab. In this case, you can submit Form 15G/15H to avoid TDS.

Now that you know how much interest you can earn through an FD and how it is treated when filing taxes, make a smart investment regardless of your risk appetite. The Bajaj Finance FD serves as an excellent option as it has the highest ICRA and CRISIL rating, allows you to invest as little as Rs.25,000, lets you select a tenor of your choice and offers convenient online application as well.