How Does The Lock-in Of Fixed Deposit Work?

A fixed deposit is one of the safest investment options among investors in India. The rate of interest offered on such investments is generally higher than the savings account. It can go up to as high as 9.10%. In addition, in case of any unforeseen situation, you can also take a loan against fixed deposits. Fixed deposits are offered by almost every bank in India, be it a private sector bank or a public sector undertaking (PSU). There are also several NBFCs that offer fixed deposit schemes to customers.

Here are some of the benefits of investing in a Fixed Deposit account:

Assured returns: The biggest advantage of investing in a fixed deposit account is that you get assured returns. The returns are generally higher than what is being offered by a savings account. Currently, banks are offering returns ranging from 7-8% as per the tenure. However, NBFCs like Bajaj Finserv offer high returns up to 9.1% on fixed deposits.

Helps in liability crunch: If you need money on an urgent basis, you have the option to take a loan against fixed deposits. You can get financing of up to 90% of the principal amount of the fixed deposit. Plus, despite taking the loan, you can still earn interest on your FD. This interest can help you repay the loan easily.

Provides flexibility: FDs provide you with the flexibility of fixing your money over a period. They come at a tenure ranging from 7 to 10 years. Choose what suits you the best and avoid the trap of premature withdrawals.

The better interest rate for senior citizens: FDs are available at better and higher interest rates for senior citizens as compared to any other regular customer.

Jointly fixed deposits: You also have the option to open a joint fixed deposit with your spouse, children or parents. However, remember that in case of premature withdrawal or loan against FDs, all FD holders are required to sign the application form.

Tax saving fixed deposits: A tax saving FD helps you to save tax on the interest earned. However, it comes with a lock-in period of 5 years which prevents you to break your FD before that. In case, you break it before the maturity period, the amount invested would not qualify for tax deductions.

With so many benefits it sounds really good to invest in a Fixed Deposit Account, but before investing, you need to know about the lock-in period.

What is a lock-in period?

A lock-in period means a specific duration of days, months or years during which you cannot withdraw the amount from his/her FD account. In case, you withdraw the money before the lock-in period, you might have to face the following consequences:

  1. Penalty: Some lenders charge penalties on the earned interest or the deposited capital if you plan to withdraw the amount during the lock-in period.
  2. No Returns: There are a few lenders that claim that the interest compounding cycle on FDs starts after the lock-in period ends. Due to which they refuse to pay any extra amount other than the invested capital to the investor.

The lock-in period can prove to be beneficial as some service providers keep the interest rate constant during the lock-in period, irrespective of the fluctuations in the market. So, during this time period, you can gain the maximum benefit of the ongoing interest rate even if the market rate lowers down in the future.

Hence, before investing in FD, make sure to keep in mind all the above-mentioned points so that you make an informed decision.

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