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What is a Fixed Deposit (FD)?

dateKnowledge Centre Team dateNovember 15, 2022 views199 Views
Fixed Deposit and its Benefits | Buy the Best Savings Plan in India

Fixed deposit has been a popular savings instrument in India. It is one of the safest and easy investment options, if you are new to investments. It will help you manage your investment portfolio easily. You can park your savings into fixed deposits with banks or post-office and earn a higher rate of interest. Fixed deposit investments allow you to keep your savings safe until you can decide on an appropriate allocation for the money.

What is a Fixed Deposit?

A fixed deposit, commonly known as FD, is an investment option with a limited maturity period and a fixed rate of return. Non-Banking Financial Corporations (NBFC), banks, post-office branches and large corporations can offer FDs to the public. You can invest your funds and receive a higher interest rate than what you receive in a regular savings account.

Fixed deposits are saving plan with a limited maturity period. You can use FDs to invest your savings for a maturity of 7 days to 10 years. The rate of interest for deposited sum will be decided in the beginning and will remain fixed until maturity.

You can choose to receive the periodical interest in your savings account or leave it to accumulate in your deposit. Accumulated interest on the fixed deposits increases the principal sum after each credit. Thus, if you do not withdraw interest from your FD you benefit from the power of compounding.

Partial withdrawals are not possible and you can withdraw money from FDs prematurely but you will need to break it. Premature termination can warrant a penalty on the credited interest. You will receive a lower rate of interest than promised earlier.

Advantages of a Fixed Deposit Account | Fixed Deposit Account Benefits

How does a Fixed Deposit Work?

You can start your fixed deposit at your bank, post-office branch or with an NBFC. Corporate fixed deposits are also an option when available. Here’s how your fixed deposit will work:

  • Select the type of FD you want to start, i.e., normal or senior citizen FD
  • Select the amount of deposit
  • Choose a tenure ranging from a minimum of 7 days to up to 10 years
  • Your interest rate of the fixed deposit will be decided based on your deposit amount, type of FD and term of the deposit
  • Interest payments:
    • FD will pay interest every quarter
    • You can choose to receive the interest in your savings account
    • You can have the interest reinvested or accumulated in the FD and receive a compound interest at maturity
  • At maturity, you will receive the accrued interest and principal back
  • In the case of premature withdrawal credited interest will be reduced by a percentage depending on the remaining tenure of the FD

Types of Fixed Deposit Accounts

Various types of FDs are available depending on the investor type and other features. Some of the most popular types of FDs are given below:

1. Standard Fixed Deposit or Term

These are the normal deposits available to resident Indians below the age of 60. The term of these deposits can range from 7 days to 10 years. The interest rate will depend on the term of the deposit.

2. Senior Citizen Fixed Deposit

Senior citizen fixed deposits are available to investors above 60 years of age. Two major differences these fixed deposits have are the rate of interest and TDS limit. The rate of interest on senior citizen fixed deposits is usually 25 basis points higher than standard FD rates. The TDS limit for the interest in these deposits is Rs 50,000.

3. Tax Saving Deposits

Tax-saving fixed deposits in India are deposits specified for deduction under section 80C of the Income Tax Act 1961. These are 5-year deposits and do not offer interest pay-out or withdrawal before maturity. So, your investment is locked in for five years in tax-saving deposits.

4. Recurring Deposits

Recurring deposits are a great way to accumulate money over a short period. You can invest in recurring deposits of 12 months to 60 months. Recurring deposits allow you to save a small fixed amount every month.

5. Flexi Deposit/Super Savers

Flexi deposits or super savers are fixed deposits linked to your savings account. Once you start the deposit the balance over the decided limit is automatically turned into a fixed deposit. If you withdraw more money from your savings account the deposit automatically fulfils the balance.

6. NRI Fixed Deposits

NRI Fixed Deposits are available to NRE/NRO account holders. NRE fixed deposits are available in foreign currency and provide tax-free interest on the deposit. NRO fixed deposits are available in INR and the interest is taxable at a rate of 30%.

7. Corporate Fixed Deposits

Corporate fixed deposits are floated by large corporations, real estate companies and businesses with significant real asset holdings. Corporate deposits also offer a fixed rate of interest. However, these FDs carry a higher risk and offer a higher return than bank FDs or NBFCs.

How to Open a Fixed Deposit Account?

In the era of internet banking opening an FD is very easy both via the offline method and online. Here’s what you can do to open an FD at a bank or post-office branch:

  • If you have a savings account with the bank/post-office
    • Fill out the fixed deposit form
    • Provide your customer code and account details
    • Submit the form at the branch
  • If you don’t have a savings account with the bank/post-office
    • Fill out the fixed deposit opening form
    • Provide your ID and address proof (PAN no as well)
    • Write a cheque or submit an ECS form for the deposit amount

Opening Fixed Deposit Online

  • Visit the bank website. For post-office FD you will need to visit the nearest post office to open a savings account and then activate your online account access
  • Login to your account or create a new account for a fixed deposit
  • Select your FD details, type, deposit amount, term and interest payment mode
  • Make payment for the deposit
  • Download the Certificate

How is Interest in a Fixed Deposit Calculated?

Interest payments on fixed deposits happen quarterly. Based on your preferred mode of interest payment it will be calculated and paid to you. You can choose any of the following two interest payment modes for your deposit:

  • Paid out to the savings account
  • Accumulated in the deposit until maturity

In the first scenario, the quarterly interest will be paid out and the FD balance remains fixed for the entire term. In the second option, the interest will also earn interest.

The basic formula to calculate interest on your FD is:

Quarterly Interest Payments = Principal x Interest Rate/4

Compounded Maturity Value = Principal*(1+ROI/4)^(Term in Years x 4)

For example, you start two FDs of Rs 50,000 each. FDs will pay an interest of 7% p.a. for the next five years. The interest payments from the FDs will be as follows:

Principal Amount: Rs 50,000

ROI: 7% p.a. payable quarterly

Interest Payment Mode: Paid out to savings account

Principal Amount: Rs 50,000

ROI: 7% p.a. payable quarterly

Interest Payment Mode: Paid on maturity

Quarterly interest paid to the depositor

50000 x 7% / 4 = Rs 875

Maturity Value (final payment from FD) Rs 50,875

Total interest received from the FD Rs 17,500

Quarterly Interest paid to the depositor will be zero,
as all the interest will be added to the principal and reinvested.

Maturity Value from the FD Rs 70,739

Total interest received from the FD Rs 20,739

The second option will give you better absolute returns as your deposit receive the power of compounding.

Why Should you Include FD in your Investment Plan?

Fixed deposits are among the safest investments in India. Longer-term FDs can offer better interest rates, and thus a preferred medium of depositing funds for pension for retired investors.

The benefits of FDs make them perfect investments to park your emergency funds. Here are the important benefits of fixed deposit investments:

1. Assured Return on Investment

The reason people invest their money in a fixed deposit is the guaranteed return on investments. Once you invest your capital in an FD (Fixed Deposit) account, you can be assured of getting the returns with a fixed rate of interest.

Banks and financial institutions regularly issue the fixed deposit rate of interest on their portal and in the branches of banks and financial institutions that makes it easier for investors to determine how much return they will receive.

In addition to this, banks and financial institutions further hold an FD interest calculator on their portals. An investor can determine the interest they will draw on investing a particular amount of money for a specific period.

2. Flexible Term

The term of investing in fixed deposit (FD) is resilient, and it entirely depends on the deposit holder to fix the term of their deposits. While every bank and financial institution holds its own minimum term rules, the deposit holder can exercise the ultimate decision. It is additionally conceivable to determine whether to extend the Fixed Deposit for the same term and redeem the fixed deposit.

3. Easy Loans

An FD is a great financial instrument that you can keep aside for meeting your financial emergencies. Apart from this, you can easily take a loan against your fixed deposit. You can get a loan of up to 95 percent of your accumulated FD amount, which may vary from bank to bank.

4. Tax Advantages

Interest or return you receive from your FD investments is exempted up to Rs 10,000 in one financial year. Apart from this, certain tax-saving fixed deposits have a lock-in period of 5 years and are exempted under section 80C of the Indian Income Tax Act, 1961 with up to relief of Rs. 1.5 lakhs.

5. Interest Rates

Fixed deposit interest rates are generally higher than the saving account interest. Also, FDs offer higher interest rates for longer-term investments and senior citizens. The interest rate on a fixed deposit is decided at the time of the deposit and remains fixed until maturity.

6. Secure Investment

A fixed deposit is a fixed-income debt instrument. Although the returns on FDs are lower than other investment options such as stocks, FDs offer the safety of the capital. Banks, post offices and NBFCs invest FD funds in government bonds and lending activities. Thus, the return on the deposit is safer than stocks.

7. Liquidity

FDs have high liquidity, as you can break the FD and withdraw funds anytime you want. You may receive a lower interest on the broken FD. However, breaking an FD is quite easy and you can receive your funds within one working day.

What Role FDs Play in your Financial Planning?

FDs can improve your financial planning by boosting your investment portfolio in several ways. The three most important aspects of including FDs in your portfolio are:

1. Offer Stability to your Portfolio

Safe and fixed ROI on fixed deposits allow FDs to add to the return stability of your investment portfolio. While your market-linked portfolio value will vary as per the market conditions, FD values will remain almost persistent.

2. Improved Asset Quality

Fixed deposits, especially long-term deposits are high-quality assets. You can borrow up to 80% of the FD value at a low rate of interest. Thus, FDs can also improve the quality of your asset portfolio.

3. Available in Short-Run

High liquidity and shorter terms of fixed deposits make it an ideal investment to fulfil short-term financial goals and offer emergency safety funds. FDs should be used for parking your emergency funds. Recurring deposits are easy ways to invest in your short-term goals.

Disclaimer: This article is issued in the general public interest and meant for general information purposes only. Readers are advised to exercise their caution and not to rely on the contents of the article as conclusive in nature. Readers should research further or consult an expert in this regard.

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FAQs on Fixed Deposits

You can start a recurring deposit with as low as Rs. 500 per month. However, for a lump sum FD you will need a minimum amount of Rs. 10,000.

Yes, you can borrow up to 80% of your FD value at a nominal rate of interest. The borrowing facility is provided by the depositing bank, post office or NBFC itself.

The following persons are eligible to open a fixed deposit in India:

  • Resident Indians including minors above 10 years of age and senior citizens
  • Non-Resident Indians
  • Hindu Undivided Family
  • Proprietorship firm
  • Corporates
  • Society or cooperative trusts
  • Any other artificial juridical person

FD nomination allows you to pass on the funds to your family after your demise. Nomination ensures that your wealth is not lost for your family due to your sudden death. It helps the banks and other institutions to return the money to your family as per your wishes. But nomination only works in your absence, i.e., death.

You can fill and submit form 15G/H with the bank branches where you hold an FD account. Understand that TDS exemption is available only to those who do not have another income source than the interest income from deposits.

Yes, you can transfer FD to another person. It will be treated as a gift to them. If they are financially dependent on you like your minor children, the interest will be clubbed into your income for tax until they reach majority.

Except for the tax-saving fixed deposits, you can withdraw your FD any time before maturity. However, premature withdrawals will cause a penalty on the interest and you will receive a lower rate of interest on your deposit.

Yes, fixed deposit interest is fully taxable in India. It is added to your annual income for tax calculation. But, if you do not have any other income, you can avail of tax-free interest of up to Rs 500,000 a year.

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