Smart fixed deposit investment tips: A guide for senior citizens in India

Experts suggest starting to save early and making wise investments. Assessing your projected retirement income and accounting for inflation is crucial to determine how much you need to save. Despite these recommendations, nearly 65% of elders find themselves financially insecure with their current income and access to savings and investments, according to a recent HelpAge India report, 'Ageing in India: Exploring Preparedness & Response to Care Challenges,' released in June 2024.

The report highlighted that many of India's elderly population are unprepared for their later years and heavily rely on others for a dignified living.

So, what can elders do if they've missed the early investment boat? It's never too late to start investing, but choosing the right tool is key. Take Mr Pandey from a district in Uttar Pradesh's Basti, for example. He has Rs 20 lakh from his provident fund (PF) and receives a monthly pension of Rs 20,000. However, with monthly medical bills for himself and his wife, utility bills, rent, and other expenses, the pension just covers the basics. Now, he's looking to invest his PF in a fixed deposit scheme.

 

What would be the best plan for Mr Pandey?

Tip 1: Opt for Senior Citizens Fixed Deposits (FDs)

Most banks offer higher interest rates (usually 50 basis points) on their senior citizens' fixed deposits. "So, it makes sense to choose senior citizen FDs and compare the interest rates of banks where you are planning to start your FD accounts," says Adhil Shetty, CEO of Bankbazaar.com.

Tip 2: Choose the Right Bank

While many prefer banks they already have relationships with, it’s worth exploring others if they offer higher interest rates. Mr Pandey could look into Fixed Deposits (FDs) from Small Finance Banks (SFBs), which offer interest rates as high as 9.1% per annum. "These rates are significantly higher compared to those offered by conventional banks. For example, Suryoday SFB and Utkarsh SFB both offer 9.1% interest on their FDs. Additionally, safety is not a concern, as these deposits (principal + interest) are insured up to Rs 5 lakhs per PAN per bank," says Vijay Kuppa, CEO of InCred Money.

Take a look at some of the banks offering 8% or higher interest rates on fixed deposits for senior citizens over 3-year and 5-year tenures:

AU Small Finance Bank FD rates

3-year tenure: 8%

5-year tenure: 7.75%

Equitas Small Finance Bank FD rates

3-year tenure: 8.50%

5-year tenure: 7.75%

ESAF Small Finance Bank FD rates

3-year tenure: 7.25%

5-year tenure: 6.75%

Jana Small Finance Bank FD rates

3-year tenure: 8.75%

5-year tenure: 7.75%

Suryoday Small Finance Bank FD rates

3-year tenure: 9.10%

5-year tenure: 8.75%

Unity Small Finance Bank FD rates

3-year tenure: 8.65%

5-year tenure: 8.65%

Utkarsh Small Finance Bank FD rates

1-year tenure: 8.60%

3-year tenure: 9.10%

5-year tenure: 8.35%

DCB Bank FD rates

3-year tenure: 8.05%

5-year tenure: 7.90%

RBL Bank FD rates

3-year tenure: 8%

5-year tenure: 7.60%

Additional rates: 0.25% on all tenures for super senior citizens

YES Bank FD rates

3-year tenure: 8%

5-year tenure: 8%

SBM Bank India FD rates

3-year tenure: 7.8%

5-year tenure: 8.25%

Deutsche Bank FD rates

3-year tenure: 8%

5-year tenure: 7.50%

Bank of Baroda FD rates

3-year tenure: 7.65%

5-year tenure: 7.15%

Bank of India FD rates

3-year tenure: 7.25%

5-year tenure: 6.75%

Additional Rates: 0.15% on tenures of 180 days to 10 years

Bank of Maharashtra FD rates

3-year tenure: 7%

5-year tenure: 7%

Canara Bank FD rates

3-year tenure: 7.30%

5-year tenure: 7.20%

Central Bank of India FD rates

3-year tenure: 7%

5-year tenure: 7%

Indian Bank FD rates

3-year tenure: 6.75%

5-year tenure: 6.75%

Additional Rates: 0.25% on all tenures

Indian Overseas Bank FD rates

3-year tenure: 7%

5-year tenure: 7%

Additional Rates: 0.25% on all tenures

Punjab National Bank (PNB) FD rates

3-year tenure: 7.50%

5-year tenure: 7%

Additional Rates: 0.30% for tenures up to 5 years

Punjab & Sind Bank FD rates

3-year tenure: 6.50%

5-year tenure: 6.50%

Additional Rates: 0.15% on tenure of 444 days, 222 days, 666 days, and 999 days

State Bank of India (SBI) FD rates

3-year tenure: 7.25%

5-year tenure: 7.50%

Union Bank of India FD rates

3-year tenure: 7.20%

5-year tenure: 7%

Additional rates: 0.25% on all tenures

Tip 3: Opt for an FD Laddering Strategy

As a retiree, Mr Pandey can use an FD laddering strategy. Instead of investing the entire amount in one FD, he can split it into different amounts and tenures based on his fund requirements. "For instance, if you have Rs 20 lakh to invest, you can split it into four FDs of Rs 5 lakh each with maturities of 1 year, 1.5 years, 2 years, and 2.5 years, providing you with annual liquidity as each FD matures," explains Kuppa.

This approach ensures that deposits in multiple banks stay covered under the DICGC insurance, which provides coverage up to Rs 5 lakh. This reduces credit risk and helps manage tax implications, as the interest earned on each FD may stay below the TDS deduction threshold of Rs 50,000 (for senior citizens).

Tip 4: Seize Opportunities to Switch FDs

Be prepared to switch FDs whenever better interest rates are available. Banks revise their FD rates periodically, so it pays to stay updated.

Tip 5: Choose the Right Tenure

The FD tenure is the period for which you commit your money to be deposited with the bank or financial institution. It starts from the date of deposit and ends on the maturity date, determining how much interest you will earn. "You can arrange FD tenures typically into short, mid, and long terms. Short-term would range from 7 days to 1 year, mid-term from 1-5 years, and long-term from 5-10 years. Generally, longer tenures give you higher interest rates, but short-term FDs provide frequent access to funds," says Shetty.

How is Interest Calculated?

Let's break down how interest is calculated on fixed deposits.

If you invest Rs 20 lakh for 1 year at an interest rate of 8%, your investment will grow to Rs 21,64,864, earning you Rs 1,64,864 in interest. If you invest the same amount at the same interest rate for 3 years, your total maturity amount will be Rs 25,36,484, resulting in interest earnings of Rs 5,36,484. This illustrates how longer tenures can increase the overall returns.

The formula to calculate interest: (Principal * (1+ rate/ Compounded interest frequency) ^ Compounded interest frequency*Tenure) - Principal

Most banks typically use quarterly compounding.

"For instance, if Mr. Pandey invests Rs 1,00,000 in Suryoday SFB, which offers a 7.35% interest rate to senior citizens for a tenure of 12 months, the interest earned would be approximately Rs 7,555," explains Kuppa.

Here's the calculation:

1,00,000 - (1,00,000*(1+0.0735/4)^(1*4)

For an 18-month tenure at the same bank, which offers a 9% p.a. interest rate, the maturity amount would be approximately Rs 1,14,282.

Similarly, for a 36-month tenure with a 9.1% p.a. interest rate, the interest earned would be approximately Rs 1,54,154.

Tip 6: Choose the Right Type of FD

There are typically two types of FDs: cumulative and non-cumulative. "In a cumulative FD, interest is compounded annually and reinvested with the principal, leading to increased returns over time as the interest earned is added to the initial investment. On the other hand, non-cumulative FDs cater to investors who prefer regular interest income, as interest is paid out periodically – monthly, quarterly, half-yearly, or annually – based on the selected payout frequency," says Shetty.

Impact of Tenure on Overall Returns

Longer tenures typically offer higher interest rates compared to shorter ones. "Banks reward investors with higher rates for locking in their funds for extended periods, as they can use the funds for longer-term lending and investment purposes," explains Vijay Kuppa.

Let's look at the interest rates offered by Suryoday SFB for different tenures:

1 Year: 7.35%

1 Year, 1 Day: 8.75%

1 Year, 4 Months: 9%

1 Year, 6 Months: 9%

2 Years: 9%

2 Years, 2 Days: 9.10%

2 Years 6 Months: 9.10%

3 Years: 9.10%

3 Years, 6 Months: 7.25%

4 Years: 7.25%

5 Years: 8.75%

"Currently, the highest interest rates are offered for medium-term tenures between 1 Year 1 Day and 3 Years. In contrast, very short-term and long-term FDs provide comparatively lower interest rates," says Kuppa.

Tax Implications of Fixed Deposit Interest for Senior Citizens

The interest earned on FDs is taxed at the Marginal Tax Rate. If you fall under the 30% tax slab, the interest you receive is taxed at that rate. Additionally, TDS is deducted from FD interest under Section 194A of the Income Tax Act.

If the interest earned exceeds Rs 40,000 for non-senior citizens or Rs 50,000 for senior citizens, the bank will deduct tax at source before crediting the interest to your account. "So, if you were to receive Rs 1,000, but 10% TDS was deducted, equalling Rs 100, you would get only Rs 900 (Rs 1,000 – Rs 100). The bank then pays the deducted amount of Rs 100 to the central government to fulfil their TDS obligation.

But if you are below taxable income, you can submit 15H and 15G forms to the bank and request them not to deduct any TDS," says Kuppa.

Can Mr Pandey Withdraw His Fixed Deposit Before the Maturity Date?

Yes, but the interest earned may be recalculated based on the new (usually shorter) tenure, significantly reducing the overall returns. Additionally, a penalty may be deducted, reducing the amount returned. Therefore, it's advisable to plan FD tenures according to your liquidity needs to avoid such penalties.

How Often is the Interest Compounded in a Fixed Deposit?

Compound interest is calculated on both the principal amount and the interest that has already been accumulated, resulting in higher returns compared to simple interest. Interest can be compounded at various frequencies, including annually, semi-annually, quarterly, or monthly.