Investment Plans 117 views August 28, 2020

Confused Between Fixed Deposits and Guaranteed Return Plans?

In today’s world, there are many financial and investment products available in the market which offers guaranteed return on investment and helps you to grow your wealth and accumulate a corpus for the future. Among different types of investment options available, the two most common investment products that offered guaranteed returns declared upfront are fixed deposit and guaranteed return life insurance plans. Guaranteed return plans additionally offer life insurance coverage as well for the individual and hence give double benefits to the individual.

Investment

To know the right investment, please fill the details below and our policy experts will get in touch with you

+91

What are fixed deposits?

Fixed deposits are investment plans offered by banks which offer guaranteed returns. As of August 2020, most fixed deposit plans return anywhere between 4%- 5.5% for large commercial banks like HDFC, SBI, ICICI etc. FDs are considered as a safe investment option and the deposits are secured up to Rs 5 lac.

The tenure of investment in fixed deposits can range from minimum 1 year to a maximum of 10 years. Also, the returns generated by the fixed deposits are fully taxable and are added to your income slab. Hence, it is important to look at post-tax returns, especially if you fall in the high tax brackets.

What are guaranteed return plans?

Guaranteed returns plans are an investment instrument offered by top insurance companies that offer dual benefits of insurance coverage and guaranteed returns. The returns generated by the guaranteed returns plans are fully tax-exempt as they enjoy the EEE exemption status under section 80C and Section 10 (10D) of the Income Tax Act. The EEE status implies that there is a tax benefit

  1. At the time of initial investment
  2. On the Returns Earned
  3. At the time of final withdrawal

Guaranteed returns plans can be taken for a tenure up to 30 years or more and typically offer higher annualized returns over the long run. As can be checked for popular guaranteed returns plans available in the market, the current annualized returns guaranteed by the insurance companies are typically in the 5-6 % range. It is important to note that there is no tax on these returns.

Guaranteed return plans also offer insurance coverage and payout a lump sum amount to your nominee in case of your death.

Quick Comparison Between Fixed Deposits and Guaranteed Return Policies

Tenor

Fixed deposits are suitable for long-term as well as short pay term investment ranging from 1 year- 5 years.

On the other hand, the life insurance policy offers life coverage as well as guaranteed returns for a minimum policy tenure of 10 years, which may even extend up to 30 years or more.

Investment

You can start investing in fixed deposits with a minimum sum of Rs.1,000. Whereas, there is no limit on the maximum investment.

On the other hand, in case of guaranteed returns plans, the premium of the policy differs from plans to plans and is determined based on various different factors such as the age of the policyholder, tenure selected etc. It is normally a minimum of Rs 2500 – Rs 5000 per month depending upon the plan selected.

Guaranteed Returns

Fixed Deposit offers a fixed return on investment along with the security of the investment being protected by DSIGC up to Rs 5 Lacs. You can also have the option of taking interest monthly/quarterly or at the time of final fixed deposit closure.

Similarly, guaranteed return plans also offer fixed returns that are declared in the beginning.

Payout Options

In fixed deposits, you have to take the payout amount at the end of the policy tenure as a lump sum.

In guaranteed return plans, you have the option of taking the accumulated corpus in the form of long-term annual / monthly instalments. You can also choose to take the accumulated corpus as a lump sum. . Payout terms can be as follows-

  1. Lumpsum – You get the entire maturity amount at the end of the policy period
  2. Annual Income – You get an annual income for a fixed number of years at the end of the policy period
  3. Lumpsum+Annual Income – You get some amount upfront while the rest as annual income for some years.
  4. Life-Long Income: You get an annual income till you die

Withdrawal

Fixed deposit schemes offer the option of partial withdrawal. However, breaking FD account before the completion of the maturity period affects the interest rate of investment and results in low ROI. Similarly, in the guaranteed return plans, premature withdrawals are permissible after 3-5 years of the policy tenure. However, your returns will be lower than what was initially promised.

If you think you may need to withdraw early, it is better to stick with fixed deposits.

Taxation

Fixed Deposits does not offer any tax benefit typically. However, there are tax-saver fixed deposits which you can take for a 5-year tenure and obtain tax benefits under section 80C.

On the other hand, you can avail tax benefit in a life insurance policy on the premium paid and maturity proceeds under section 80C and 10(10D) of Income Tax Act 1961.

Summary

Fixed deposit schemes help you to create a habit of savings and are suitable for 1 – 5 years of investment tenure. On the other hand, guaranteed returns plans offered by insurance companies work for you if you have a very long investment horizon and are saving for the future.

If you are in a high tax bracket , you should definitely look at guaranteed return plans to maximize your post-tax returns. Otherwise, fixed deposits may be good for you if you are in low income tax slabs. Additionally, if you don’t have a separate term insurance plan, then you should definitely invest in a guaranteed returns investment plans.

People Also Read