Fixed deposits (FDs) are among the most popular investment instruments in the Indian financial market, offering secure returns over a stipulated period. While FDs traditionally involve tying up funds until maturity, some types now cater to investor needs for liquidity by allowing partial withdrawal without penalty. These types of FDs come with unique features that are beneficial for individuals who require a balance between fixed returns and financial flexibility.
Understanding these types of FD and their benefits is essential for making informed investment decisions.
Types of Fixed Deposits That Allow Partial Withdrawal
1. Sweep-in FDs
Sweep-in fixed deposits combine the benefits of a savings account with the higher returns of an FD. With a sweep-in facility, excess funds from your savings account are automatically shifted into fixed deposits to earn higher interest. When the funds from your savings account are insufficient for withdrawal, the bank can “sweep out” a portion of your FD to honor your financial needs. Key points include:
– Partial withdrawal: You can withdraw the required portion of your FD without penalty.
– Interest calculation: Interest is calculated on the remaining amount in the FD after the withdrawal, ensuring no full-term penalty.
Example calculation: Suppose you maintain a savings account with ₹2,00,000, and the sweep-in FD facility moves ₹50,000 into a fixed deposit earning 6% annual interest. If you need ₹25,000 for immediate use, the bank withdraws this amount from the FD without impacting the interest on the remaining ₹25,000.
2. Flexible FDs
Flexible fixed deposits allow limited partial withdrawals from the locked-in amount without penalizing the individual. This type of FD typically comes with predefined conditions and limits on the frequency or percentage of withdrawals.
– Partial withdrawal: Investors can withdraw specific sums from their FD while leaving the remaining funds intact to earn interest.
Example: If you have ₹1,50,000 in a flexible FD at an interest rate of 5.5% per annum and withdraw ₹40,000 due to an urgent expense, you’ll continue to earn interest on the remaining ₹1,10,000.
3. Corporate FDs with Partial Liquidity Feature
Some corporate FDs—offered by Non-Banking Financial Companies (NBFCs) or corporations—provide the option for partial withdrawal without penalty. However, each company varies in terms of eligibility and limits.
– Partial liquid facility: Investors often choose corporate FDs for their higher interest rates, and withdrawals may be permissible within a specific percentage of the initial deposit.
Example calculation: Assume a corporate FD with ₹5,00,000 at an interest rate of 7% for five years, where up to 20% withdrawal is allowed without penalty. You can withdraw ₹1,00,000 without incurring fees and still earn interest on the remaining ₹4,00,000.
4. Recurring Deposit Plus Withdrawal Option
Though technically not a fixed deposit, some banks offer recurring deposits (RDs) with flexible withdrawal options. These deposits allow you to make systematic investments while retaining partial liquidity, similar to certain FDs.
Tax Considerations: Tax on Savings Account vs. Fixed Deposits
FDs and savings accounts differ significantly in terms of taxation. Interest earned on fixed deposits is taxable under the investor’s applicable income tax slab, whereas interest earned on tax on savings account is free up to ₹10,000 annually under Section 80TTA. Consider the following calculation:
– Suppose you earn ₹12,000 on savings account interest in a fiscal year. Out of this, ₹10,000 is exempted, and the remaining ₹2,000 is taxable based on your income tax slab.
– For FD interest: Assume interest earned is ₹50,000 in a fiscal year. This amount is fully taxable according to the chosen income tax slab, with no exemptions available like in savings accounts.
Investors must evaluate the tax implications to maximize returns effectively. FDs that allow partial withdrawals may impact the total interest accrued, especially when frequent withdrawals are made, but the tax liability remains proportionate to the interest earned.
Benefits of FDs With Partial Withdrawal Option
FDs with partial withdrawal facilities are a boon for individuals who want the best of both worlds: secure returns and financial accessibility. Some advantages include:
1. Liquidity: They provide you with immediate access to funds in emergencies without the need to break the FD entirely.
2. Retention of Returns: Partial withdrawals ensure that the remaining FD amount continues to accrue interest.
3. Tax Planning: These FDs allow you to defer some withdrawals and plan effectively for tax liabilities.
Important Considerations
While these FDs may sound appealing, investors must carefully assess the terms and conditions attached to them. For example:
– Withdrawal limits
– Applicable interest rates post-withdrawal
– Fees or charges associated with withdrawals
– Whether you’ll still receive competitive returns after partial withdrawals
Additionally, investors should compare these FDs with other liquidity-focused products, like savings accounts or liquid mutual funds, to identify the most suitable solution for their financial goals.
Disclaimer
Investing in FDs or similar financial instruments involves consideration of multiple factors, including market conditions, prevailing interest rates, and personal liquidity needs. This article serves as general informational content and does not constitute professional financial advice. Investors must gauge all the pros and cons of trading in the Indian financial market and consult professionals for tailored strategies.
Summary
Types of Fixed Deposits That Allow Partial Withdrawal Without Penalty offer flexibility alongside secure returns. Popular types of FDs in this category include sweep-in FDs, flexible FDs, corporate FDs, and recurring deposits with withdrawal options. These instruments enable individuals to withdraw portions of their deposits as needed without incurring penalties. For instance, sweep-in FDs seamlessly convert savings account balances into fixed deposits, and funds can be withdrawn in emergencies without impacting returns.
Tax implications differ for FDs and savings accounts, with FD interest being fully taxable, while savings account interest enjoys exemptions under Section 80TTA. While these types of FDs provide liquidity benefits, investors must carefully review terms and conditions, withdrawal limits, and applicable interest rates post-withdrawal to ensure financial goals are met. A balanced approach will allow you to enjoy secure investments while planning for unforeseen expenses effectively.
