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How Fixed Deposits Support Small Business Growth

mahindra-finance-author

by Mahindra Finance

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March 4, 2024

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5 mins read

Starting and expanding a small business requires financial support. As an entrepreneur, you may be wondering about the best financing options available to you. One such option that can provide stability and growth opportunities for your business is a fixed deposit (FD). In this blog post, we will explore how FDs can benefit small businesses in India and support their growth.

Understanding Fixed Deposits for Small Businesses

Fixed deposits are investment instruments offered by banks and non-banking financial companies (NBFCs). When you open an FD account, you deposit a specific amount of money for a predetermined period at a fixed interest rate. At the end of the tenure, you will receive the principal amount along with the accumulated interest and can take the advantages of a fixed deposit account.

Fixed deposit benefits for small businesses:

  • Capital preservation: FDs provide a secure way to preserve your capital while earning a steady return. The invested amount is not subject to market fluctuations, making it ideal for risk-averse entrepreneurs.
  • Assured returns: The interest rates on FD are predetermined and remain constant throughout the tenure. This allows you to accurately calculate the returns on your investment.
  • Liquidity: While FDs have a lock-in period during which you cannot withdraw funds without incurring penalties, they still offer liquidity compared to long-term investments like real estate or equity shares.

To understand the fixed deposit benefits more clearly, let's consider an example:

Scenario 1:

Rahul runs a small bakery in a semi-urban area. He has surplus funds but wants to maintain liquidity while earning some additional income. Rahul decides to invest ₹5 lakh in an FD for a period of 3 years at an interest rate of 6% per annum.

Using a simple formula, we can calculate the maturity amount:

Maturity Amount = Principal Amount × (1 + Interest Rate/100) ^ Time Period

Maturity Amount = ₹5,00,000 × (1 + 6/100) ^ 3

Maturity Amount = ₹5,00,000 × (1.06) ^ 3

Maturity Amount ≈ ₹5,92,570

After 3 years, Rahul will receive approximately ₹5,92,570. This additional income can be reinvested in his bakery business for expansion or any other financial needs.

FD tax exemptions for Small Businesses

Apart from the aforementioned advantages, FDs also offer tax benefits for small businesses. One such FD tax exemption is the deduction on FD interest available under Section 80TTB of the Income Tax Act.

According to this provision, senior citizens (individuals aged 60 years and above) are eligible for a deduction of up to ₹50,000 on the interest earned from their fixed deposits in a financial year. This deduction is applicable for both bank FDs and NBFC FDs.

Business Fixed Deposit Rates and Growth Opportunities

Fixed deposit businesses are specifically designed for small businesses and offer higher interest rates compared to personal fixed deposits. These rates vary across different banks and NBFCs, so it's essential to compare them before making a decision to get the best fixed deposit benefits.

Let's consider another scenario to understand how business fixed deposit rates can support small business growth:

Scenario 2:

Priya runs a rural handicraft business and wants to expand her operations. She decides to invest ₹10 lakh in a business fixed deposit offered by a reputed bank at an interest rate of 8% per annum for a tenure of 5 years.

Using the same formula as before, we can calculate the maturity amount:

Maturity Amount = Principal Amount × (1 + Interest Rate/100) ^ Time Period

Maturity Amount = ₹10,00,000 × (1 + 8/100) ^ 5

Maturity Amount = ₹10,00,000 × (1.08) ^ 5

Maturity Amount ≈ ₹14,69,328

After 5 years, Priya will receive approximately ₹14,69,328. This additional capital can be used to purchase new machinery, hire more artisans, or explore new markets for her products.

Conclusion

Fixed deposits provide significant support to small businesses in India by offering capital preservation, assured returns, liquidity, and tax benefits. By taking advantage of fixed deposit benefits tailored for business purposes and competitive interest rates, entrepreneurs can access the necessary funds for growth and expansion. If you're looking for a reliable financing solution for your small business, consider exploring fixed deposit options provided by trusted institutions like Mahindra Finance.

FAQs

Q: Can I open a fixed deposit account for my partnership firm?

Yes, you can open a fixed deposit account for your partnership firm. However, it's important to check with the bank or NBFC regarding their specific requirements and documentation.

Q: Are FDs eligible for FD tax exemption under Section 80C?

No, FDs are not eligible for tax exemption under Section 80C of the Income Tax Act. However, they offer tax deduction benefits under Section 80TTB for senior citizens.

Q: Can I withdraw money from my FD before the maturity period?

Yes, you can withdraw money from your FD before the maturity period. However, this may incur penalties and result in lower returns. It's advisable to check the terms and conditions of your FD for withdrawal policies.

Q: What are the current business fixed deposit rates offered by financial institutions?

Business fixed deposit rates vary across institutions. It is advisable to compare rates and terms offered by different banks and financial institutions before making a decision.

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