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Fixed Deposit (FD) has always been the most trusted financial instrument for common investors looking for safe investments and assured returns. In recent times, when big public and private banks are keeping their interest rates within a limited range, the leading private sector bank ‘Bandhan Bank’ has offered very attractive interest rates on medium term FDs. Bandhan Bank is offering attractive annual returns ranging from 7% to about 7.5% (and about 7.95% for senior citizens) for tenures ranging from 1 year to 3 years to its general citizens and senior citizens. In such a situation, if an investor deposits a lump sum capital of ₹ 1,00,000 (one lakh rupees) for a period of 2 years or 3 years at an estimated interest rate of 7.5% per annum, then it is important for every investor to understand the exact calculation of how much amount will be received on maturity with the power of Quarterly Compounding.
The return on FD in banks is mainly decided on the basis of quarterly compounding. What this simply means is that every three months the interest earned gets added to your principal amount and interest is earned on that increased balance in the next quarter, making the net return much higher than normal simple interest. Bandhan Bank is a scheduled commercial bank recognized by the Reserve Bank of India (RBI), which also means that each customer’s capital up to ₹5 lakh deposited in it remains fully safe and insured under the ‘Deposit Insurance and Credit Guarantee Corporation’ (DICGC). Let us see how big an investment of ₹1 lakh will create in 2 and 3 years.
If you invest an amount of ₹1,00,000 in a cumulative FD at 7.50% annual interest rate for 2 years, your returns after 24 months with quarterly compounding will be as follows:
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Total Principal Amount: ₹1,00,000
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Annual Interest Rate: 7.50%
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Compounding Frequency: Quarterly
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Total Tenure: 2 years (8 quarters)
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Total Interest Earned in 2 years: Approximately ₹16,022
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Total maturity amount to be received after 2 years: Approximately ₹1,16,022
Simply put, by keeping the money untouched for 2 years, you will earn an extra ₹16,000 in interest alone. If you also calculate the actual slab rate of Bandhan Bank (which is around 7.45% for general citizens), this amount works out to be very close to ₹15,908 to ₹16,000.
When you extend your investment tenure by one more year to 3 years (36 months), the effect of compounding becomes even stronger. The returns on investment of ₹1 lakh in 3 years will be as follows:
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Total Principal Amount: ₹1,00,000
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Annual Interest Rate: 7.50%
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Compounding Frequency: Quarterly
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Total Tenure: 3 years (12 quarters)
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Total Interest Earned in 3 years: Approx ₹24,972 (Approximately ₹25,000)
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Total maturity amount to be received after 3 years: Approximately ₹ 1,24,972 (approximately ₹ 1.25 lakh)
That means, within 3 years, approximately one-fourth of your original capital will come into your pocket in the form of net interest. This return is best for those who want to set aside money for a goal (like child’s school fees, buying a household item or emergency fund) within 3 years without taking any market risk.
For senior citizens (aged 60 years and above) Bandhan Bank offers additional interest ranging from 0.50% to 0.75% over the normal rates. If an elderly citizen makes an FD for a period of 2 to 3 years, the effective interest rate reaches around 7.75% to 7.95%.
In this situation, on an investment of ₹ 1 lakh, senior citizens can get a lump sum interest of approximately ₹ 17,100 to ₹ 17,200 in 2 years and approximately ₹ 26,500 to ₹ 27,000 in a period of 3 years. For monthly expenses, if the elderly wish, they can also choose the option of ‘monthly or quarterly interest payout’ instead of cumulative, in which the interest will be deposited directly into their pension or savings account.
It is very important to know the tax rules while investing in bank FD. As per income tax rules:
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TDS limit: If the total interest received by a common citizen from all bank FDs in a financial year exceeds ₹40,000, then the bank deducts TDS at the rate of 10%. This exemption limit for senior citizens is ₹50,000 per year. The annual interest on an FD of ₹1 lakh comes to around ₹7,500, which is much less than the limit of ₹40,000, so TDS will not be deducted on this single deposit.
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Liability as per tax slab: Even if TDS is not deducted, the interest income from FD gets added to the total annual income of the investor and the individual is liable to pay tax on it as per his/her respective tax slab. If your total annual income is less than the taxable limit, you can fill Form 15G (Form 15H for senior citizens) and submit it to the bank so that there is no deduction of TDS.
Bandhan Bank also provides liquidity facility on its fixed deposits. If you suddenly need money before the completion of the tenure, you can break the FD prematurely, although a penalty charge of 1% is usually deducted from the interest rate applicable on it.
The second and more sensible option is to invest in the FD without breaking it. Loan or Overdraft (Loan Against FD) Let it be taken. In Bandhan Bank, you can easily take a loan up to 90% of your deposit amount, the interest rate on which is only 1.5% to 2% more than your FD rate. This does not break your interest cycle and also fulfills your need for emergency cash.
Existing customers of Bandhan Bank can open FD in a paperless manner in 2 minutes through their mobile banking app (mBandhan 2.0) or net banking portal. New customers can start this high return FD by visiting the official website of the bank and opening a digital account through Video KYC or by presenting Aadhaar card, PAN card and check at the nearest bank branch.