Exploring Fixed Deposits for Children: Advantages and Varieties

As a parent looking to secure your child’s future, fixed deposits (FDs) can be a great option. FDs are a safe way to save money while earning interest over time. However, to make the most of FDs, it is important to understand FDs in great detail. Learn about its advantages and the various types available in India, to book an FD that suits your needs. Let’s look at these instruments in greater detail to make informed decisions.

Advantages of Fixed Deposits

Here is how getting an FD can be useful in securing your child’s future:

1. Financial Security: FDs are known for their stability. It is a reliable option for saving money for a child’s future needs like education, marriage, etc.

The principal amount and interest are guaranteed. Thus, there is no risk of losing the invested money. This makes it a better option than market-linked instruments that are more volatile.

2. Encouraging Savings Habit: Opening an FD in a child’s name can instill the habit of saving early on. It teaches children the value of money and the importance of saving for future goals. This early exposure to financial planning can help them develop a discipline. Such habits can be quite beneficial in the long run.
3. Higher Interest Rates: FDs often come with interest rates higher than savings accounts. By investing in an FD, you can maximise the returns on your savings. This ensures that the money grows significantly over time. It is particularly beneficial for long-term goals. This is because the impact of compounded interest becomes substantial over longer periods.

4. Tax Benefits: FDs with a lock-in period of 5 years, are eligible for tax deductions. This is as per Section 80C of the Income Tax Act, 1961. This can help you save on your tax liabilities while securing funds for your child’s future. The interest earned on FDs opened in a minor’s name is also taxed. However, you can claim a tax exemption of up to ₹1500 on the interest earned on such FDs under Section 10(32), each fiscal. These small savings, when collected over time, can maximize your deposit returns.

5. Flexible Tenors: FDs offer flexibility in the investment tenor. These usually range from 7 days to 10 years. This enables you to choose a tenor that aligns with your financial goals. You can thus make investments as per set milestones for your child. By choosing the tenor carefully, save money for your child’s future strategically. Plan and set aside deposits for specific purposes like paying for your child’s educational fees, wedding expenses, and so on.
6. Loan Against FD: In case of emergencies, you can get a loan against your fixed deposit without breaking it. Most issuers offer loans or overdraft facilities of up to 90% of the FD amount. This provides liquidity while ensuring that the FD continues to earn interest.

Types of Fixed Deposits

Before booking a fixed deposit for children, it is essential to choose the type of FD that best suits your needs. Let’s understand the various types in detail so that you can make a well-informed decision:

1. Standard Fixed Deposits: These are the most common types of FDs. Here, a lump sum amount is invested for a fixed tenor at a set interest rate. On maturity, the deposited amount along with the accrued interest is paid out. You can open a standard FD in your child’s name. These usually come in two subtypes – Cumulative and Non Cumulative FDs.

Cumulative Fixed Deposits: Herein, the interest earned is compounded. It is accrued and paid out at the time of maturity along with the principal amount. This option is beneficial if you do not need periodic interest payouts. You can then accumulate the interest earnings to maximise the maturity amount. Cumulative FDs can significantly enhance the corpus, especially for long-term investments.

Non-Cumulative Fixed Deposits: Non-cumulative FDs provide regular interest payouts. The payouts are usually offered on a monthly, quarterly, half-yearly, or annual basis. This type of FD is suitable for parents who need a steady stream of income from their investments. Such FDs enable you to keep the principal amount intact. Meanwhile, the payouts can be used for recurring expenses like tuition fees and so on.

2. Tax-Saving Fixed Deposits: Tax-saving FDs usually have a lock-in period of 5 years. These usually offer tax deductions under Section 80C of the Income Tax Act, 1961. You can claim a deduction of up to ₹1.5 Lakhs by investing in a tax-saving FD. This helps you in planning your taxes while saving money for your child’s future.
3. Flexi Fixed Deposits: These combine the features of fixed deposits and savings accounts. This enables you to enjoy liquidity and higher interest rates. Flexi FDs are linked to your savings account. Thus, any excess amount beyond a certain threshold is directly added to the FD. This option provides the benefit of higher returns along with easy access to funds. These deposits also enable you to withdraw money as needed. Meanwhile, the remaining amount continues to earn interest.

Considerations and Limitations

Here are some things you should keep in mind prior to booking an FD for your child:

1. Interest Rates: Before investing, compare the current FD interest rates in India. Check the rates offered by various issuers across India. This helps ensure that you get the best possible returns. Even a slight difference in rates can significantly impact the maturity amount. This is especially the case for long-term investments.
2. Tenor and Financial Goals: Choosing the right tenor is crucial. It should align with your financial goals and plans. So, assess your child’s future needs. Then, select an appropriate tenor that matches the time frame for those needs. For instance, a longer tenor might be suitable for education or marriage.
3. Premature Withdrawal Penalties: It is important to understand the charges of breaking an FD before maturity. Some banks may reduce the interest rate or charge a penalty, which can affect the returns. Knowing these terms can help you make informed decisions in case of emergencies.
4. Tax Implications: Be aware of the tax implications of investing in FDs in your child’s name. While FDs are taxable, certain exemptions and deductions can help minimise the burden. Consult a financial advisor or tax professional. They can help you find ways to optimise these tax benefits and save money.
5. Issuer’s Credibility: Investing with a reputable issuer is important to ensure the safety of the funds. Before booking, check the institution’s credit rating, customer reviews, and overall stability. This reduces the risk of defaults and ensures that the investment is secure.
6. Nomination Facility: Ensuring that the FD has a proper nomination is important. It ensures seamless transfer of funds in case of your unfortunate demise. Make sure to add your child as a nominee, so that in your absence, they can easily access the funds you saved for them.

FDs are a reliable savings tool for securing your child’s financial future. Understand the various types of FDs and their advantages to make informed decisions. Use this instrument strategically to meet all of your child’s future financial needs.