Banking Module: Products of Bank Investment Policies PDF

GROW BRIGHT ACADEMY PVT.LTD BANKING MODULE CHAPTER: 3 PRODUCTS OF BANK: INVESTMENT POLICIES 1|Page What is a Fixed Deposit? Fixed Deposit is an Investment Policy, offered Bank & NBFC (Non Banking Finance Company), Where you can d...

GROW BRIGHT ACADEMY PVT.LTD BANKING MODULE CHAPTER: 3 PRODUCTS OF BANK: INVESTMENT POLICIES 1|Page What is a Fixed Deposit? Fixed Deposit is an Investment Policy, offered Bank & NBFC (Non Banking Finance Company), Where you can deposit money for a higher rate of interest than savings accounts. You can deposit a lump sum amount in Fixed Deposit for a specific period, which varies every financier. From a other point of view it’s A Loan, which was given by customers to Bank & any NBFCs (7 Days to 20 Years). After that Bank have to return the principal amount with a interest. All Banks in India Offer fixed deposits schemes with a wide range of tenures for periods from 15 days to 10 years. These are also popularly known as FD accounts. However, in some other countries these are known as "Term Deposits" or even called "Bond". The term "fixed" in Fixed Deposits (FD) denotes the period of maturity or tenor. Therefore, the depositors are supposed to continue such Fixed Deposits for the length of time for which the depositor decides to keep the money with the bank. However, in case of need, the depositor can ask for closing (or breaking) the fixed deposit prematurely by paying a penalty (usually of 1%, but some banks either charge less or no penalty). (Some banks introduced variable interest fixed deposits. The rate of interest on such deposits keeps on varying with the prevalent market rates i.e. it will go up if market interest rates go and it will come down if the market rates fall. However, such type of fixed deposits has not been popular till date). Cumulative Interest vs Non-cumulative Interest: Choose from Cumulative FDs (where interest is payable at the time of maturity) or Non-cumulative FDs (where interest may be payable at monthly, quarterly, half-yearly or annual basis). Rate Of Interest: Interest rate is always variable 4% - 7% (Simple Interest vs Compound Interest) The rate of interest for Fixed Deposits differs from bank to bank (unlike earlier when the same were regulated by RBI and all banks used to have the same interest rate structure. Example: TENURE GENERAL SENIOR CITIZEN 7 days to 45 days 3.25 % 3.75 % 46 days to 179 days 4.25 % 4.75 % 180 days to 210 days 4.75 % 5.25 % 211 days to less than 12 months 4.75 % 5.25 % 12 months to less than 24 months 5.50 % 6.00 % 2 years to less than 3 years 5.50 % 6.00 % 3 years to less than 5 years 5.75 % 6.25 % 5.75 % 6.25 % 5 years and up to 10 years **NOTE: Rate of interest (show in this table) is variable as per individual Bank 2|Page Example: COMPOUND INTEREST / Amount: 1,00,000/-, R.O.I: 6.00%, Tenure: 2 years Deposit Date: 2/1/2000 2001 Mature Date: 1/1/2002 Deposit Amount: 1,00,000/- (DA) *1,00,000 X 6.00 % = 6,000/- (I) *1,06,000 X 6.00 % = 6,360 (i2) Rate Of Interest: 6.00 % (ROI) 1,00,000/- (DA) + 6,000/- (I) 1,06,000/- (DA+I) + 6,360 (i2) Interest: 6,000/- (I) = 1,06,000/- = 1,12,360/- (Mature Amount) (DA + I) [(DA + I) + i2] Example: SIMPLE INTEREST / Amount: 1,00,000/-, R.O.I: 6.00%, Tenure: 2 years Deposit Date: 2/1/2000 2001 Mature Date: 1/1/2002 Deposit Amount: 1,00,000/- *1,00,000 X 6.00 % = 6,000/- (I) *1,00,000 X 6.00 % = 6,000/- (i2) R.O.I: 6.00 % = 1,00,000/- (DA) + 6,000/- (I) [= 1,00,000/- (DA) + 6,000/- (I)] + 6,000/- (i2) Interest: 6,000/- = 1,06,000/- = 1,12,000/- (Mature Amount) (DA + I) [(DA + I) + i2] We can do Fixed Deposits At:  Nationalized Bank: SBI, PNB, BOI etc.  Pvt. Bank: ICICI, Axis, HDFC etc.  Small Finance Bank: Jana, Ujjivan etc.  NBFC: Bajaj Finance, DHFL etc. Types Of Fixed Deposits:  Regular Fixed Deposit. (Less than 60 years)  Senior Fixed Deposit (Age Limit: Above 60)  Flexi Fixed Deposit.  Tax Savings Fixed Deposit. (Lock in tenure of 5 years)  Shareholder’s Fixed Deposits. Tax Savings Fixed Deposit:  5-year lock-in period.  Minimum investment of 10,000 and maximum of 150,000 for a duration of 5 years.  No premature withdrawal and auto-renewal facility.  Interest earned is taxable.  FD allows only a one-time lump sum deposit Different Between All Types Of Bank & Others Financial Corporations: (Fixed Deposit) All Types Of Bank:  Higher Interest  Lower Security  Loan Facilities Not Available  Flexi FD not available Others Financial Corporations:  Lower Interest  Higher Security  Loan Facilities Available  Flexi FD available 3|Page  What is Recurring Deposit? Under these type of deposits, the person has to usually deposit a fixed amount of money every month (usually a minimum of Rs,10/- p.m.). Any default in payment within the month attracts a small penalty. However, some Banks besides offering a fixed installment RD, have also introduced a flexible / variable RD. Under these flexible RDs the person is allowed to deposit even higher amount of Installments, with an upper limit fixed for the same e.g. 10 times of the minimum amount agreed upon. These accounts can be funded by giving Standing Instructions by which bank withdraws a fixed amount on a fixed date of the month from the saving bank of the customer (as per his mandate), and the same is credited to RD account. Recurring Deposit accounts are normally allowed for maturities ranging from 6 months to 120 months. A Pass book is usually issued wherein the person can get the entries for all the deposits made by him / her and the interest earned. Banks also indicate the maturity. Rate Of Interest 6% - 8% Time: Min. 6 Months to 10 Years (Multiple 3 month) Minimum Balance: 10/- (Depends on Bank) The main features of Recurring Deposit account are as follows:  Recurring Deposit schemes aim to inculcate a regular habit of saving among the public.  Minimum amount that can be deposited varies from bank to bank. It can be an amount as small as Rs.10.  The minimum period of deposit starts at six months and the maximum period of deposit is ten years.  The rate of interest is equal to that offered for a Fixed Deposit and is hence higher than any other Savings scheme.  Premature and mid term withdrawals are not allowed. However, the bank may allow to close the account before the maturity period, sometimes with a penalty for premature withdrawal.  RD offers the additional benefit of taking loan against the deposit, i.e., by using the deposit as a collateral. About 80 to 90% of the deposit value can be given as loan to the account holder.  The Recurring Deposit can be funded periodically through Standing Instructions which are the instructions given by the customer to the bank to credit the Recurring Deposit account every month from his/her Savings or Current account. Recurring Deposit: Eligibility Criteria  Any individual.  Any minor who is above 10 years of age is eligible to open a recurring deposit account if he or she provides proof of the name.  Any minor who is below or equal to 10 years of age under the guardianship of natural or legal guardian.  Any corporate, company, proprietorship or commercial organization.  Any government organization. 4|Page  Recurring Deposit: Documents Required  Application form which can be obtained from the bank you select to open the recurring deposit account in.  Passport size photographs of the applicant.  Identity proof and address proof of the applicant willing to open the recurring deposit account.  KYC documents if the bank requests for it.  For Annual Income of Less than Rs.2.5 Lakh: For people earning less than Rs. 2.5 Lakh per annum, the TDS applicable is 10% of the interest earned on the recurring deposit account if the interest earned on the principal amount exceeds Rs.10,000. To avoid any payment of tax on the interest, it can be done so by claiming refund of the TDS deducted. This can be done by submitting Form 15G to the income tax department.  For Annual Income between Rs.2.5 Lakh and Rs.5 Lakh: For people earning an annual income ranging between Rs.2.5 Lakh to Rs.5 Lakh, the TDS applicable is 10% of the total income earned as interest on the principal amount in the recurring deposit account although it should exceed Rs.10,000.  For Annual Income between Rs.5 Lakh and Rs.10 Lakh: For people earning an annual income ranging between Rs.2.5 Lakh to Rs.5 Lakh, the TDS applicable is 10% of the total income earned as interest on the principal amount in the recurring deposit account although it should exceed Rs.10,000. The income tax to be paid by the person earning an annual income between Rs.5 Lakh and Rs.10 Lakh is 20% of the total income. The bank will deduct only 10% TDS which means when the person files the ITR, tax has to be paid at the rate of 10.3%.  For Annual Income between more than Rs.10 Lakh: For people earning an annual income ranging between Rs.2.5 Lakh to Rs.5 Lakh, the TDS applicable is 10% of the total income earned as interest on the principal amount in the recurring deposit account although it should exceed Rs.10,000. The income tax to be paid by the person earning an annual income between Rs.5 Lakh and Rs.10 Lakh is 30% of the total income. The bank will deduct only 10% TDS which means when the person files the ITR, tax has to be paid at the rate of 20.6%. 5|Page What is Provident Fund (PF)? As compulsory, government-managed retirement savings scheme, Provident Fund enables employees to contribute a part of their savings each month towards their pension fund. Over time, this amount gets accrued and can be accessed as a lump sum amount, at the end of their employment or at retirement. The Provident Fund money is a huge amount that helps you grow your retirement corpus. There are mainly three different types of PFs, which include the following:  The General Provident Fund is a type of PF which is maintained by governmental bodies, including local authorities, the Railways and other such bodies. Thus, these types of PFs are mainly defined by the government bodies.   The Recognized Provident Fund is the one which applies to all privately-owned organizations that contain more than 20 employees. Moreover, holding a rightful claim to the PF associated with your organization, you will be given a UAN or Universal Account Number. This enables you to transfer your PF funds from one employer to another whenever you move from one occupation to another.   The Public Provident Fund is defined by the voluntary nature of investment on the part of the employee. The PPF is also associated with a minimum deposit of INR 50 and a maximum amount of Rs. 1.5 lakhs. This PF also comes with a pre-determined maturity period of 15 years, only after which any form of withdrawal can be done from the account. While Provident Funds are low-risk investment avenues that can help you grow your money easily, it is important to invest the PF funds in smarter investment avenues that enable you to grow your funds furthermore. 6|Page What is PPF (Public Provident Fund)? A PPF or Public Provident Fund is a tax-free savings scheme offered by the Government of India, wherein interest on the account is set for every quarter and is paid by the government. Eligibility Criteria:  Any individual who is a resident of India can only open a PPF account  NRIs are not eligible to open PPF accounts. However, a resident Indian who has become an NRI after opening a PPF account can continue the account till maturity  Additionally, parents/guardians can also open PPF accounts for their minor children  Opening of joint accounts and multiple accounts are not allowed PPF Tenure: PPF account matures after the expiry of 15 years from the end of the financial year in which the account was opened. For example, if the PPF account was opened on Jan 1, 2010, it will mature on March 31, 2025, i.e. 15 years from March 31, 2010. At maturity, you can extend the PPF account indefinitely in blocks of 5 years at a time. Minimum and Maximum Contribution: The minimum annual contribution that can be made to a PPF account is Rs. 500 while the maximum is capped at Rs. 1.5 lakh. The maximum limit applies to contributions made by a person for himself and for a minor child, both. There can be a maximum of 12 contributions in a year. How to open a PPF account: PPF accounts can be opened at nationalized banks and major private banks such as ICICI and Axis Bank. In several banks like ICICI and Axis Bank, you can also open a PPF account online through net banking even Post Office Also. Once the account is opened, a passbook similar to the bank passbook recording all transactions such as subscriptions, interest, withdrawals, etc. will be issued. However, some other banks simply allow PPF entries to be viewed online instead of issuing a passbook. Documents Required:  PPF account opening form (Form A) can be obtained from specified bank branches or can be downloaded online.  ID proof  Address proof  Photograph of the account holder  Nomination form 7|Page Maturity of Account: PPF account matures after a period of 15 years from the end of the financial year in which the account was opened. At the time of maturity, the account holder has three options: Withdrawal of maturity amount: The account holder can withdraw the PPF amount along with the interest accrued thereon. The entire maturity proceeds are exempt from tax. Extension of PPF with contribution: A subscriber can extend the life of the PPF account indefinitely in blocks of 5 years at a time. The subscriber has to submit a request to extend the account, with further contributions by submitting Form H. The choice of extension with contribution has to be made within one year from the date of maturity, otherwise the default choice of extension without further contribution applies. Once the account is extended with contributions, maximum 60% of the balance as on the date of extension of the account can be withdrawn. This amount can be withdrawn in one go or can be spread over several years. A maximum of one withdrawal can be made in a year. Extension of PPF without further contribution: If no choice is made, then the default choice,.i.e. extension without further contribution applies. You do not need to fill any form to choose this option. A maximum of one withdrawal is allowed per year and any amount up to the total balance in the account can be withdrawn. 8|Page