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What is a Fixed Deposit?

A Fixed Deposit, also called term deposit, is a lump sum deposit made for a fixed tenure in your bank. When the account is opened, a fixed interest rate is agreed upon for the tenure of the deposit.

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What is Fixed Deposit?

What is a Fixed Deposit?

What is Fixed Deposit?
November 29, 2023

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What is a Fixed Deposit?

Fixed Deposits are one of India's most popular methods of saving money. Fixed Deposits are easy to open, offer good returns, and, more importantly, are one of the safer investment options available to customers.

So, what exactly is a Fixed Deposit?

A Fixed Deposit, also called term deposit, is a lump sum deposit made for a fixed tenure in your bank. When the account is opened, a fixed interest rate is agreed upon for the tenure of the deposit. You will receive the initial deposit plus the compound interest at the end of the tenure. Fixed Deposits can prove to be great avenues for one time investment plans helping you achieve steady growth without taking any risk.

How Does Fixed Deposit Work?

A fixed deposit is an investment option offered with guaranteed returns. Banks, India Post Office, and Non-Banking Financial Companies offer Fixed Deposits in India. Customers are allowed to make a one-time lump sum deposit for a predetermined tenure and earn interest on this amount at a higher rate than that offered on a savings account.

For most fixed deposits, the tenure can range from 7 days to 10 years. There is flexibility in choosing this tenure period, and you can safely make profits on any idle funds with this tool. The interest rate will generally depend on the duration of the deposit.

However, to earn the interest rate, the money should not be withdrawn before the tenure is decided when opening the account. In case the money is withdrawn before the end of tenure, a penalty is charged by the bank. Some banks may offer a premature facility without the penalty charge but at the cost of a much lower interest rate on the fixed deposit amount.

On the fixed deposit's maturity date, the bank credits the principal amount plus interest to the account holder’s bank account.

Understanding how a fixed deposit works will help you understand the kind of investment you are making and committing to.

Types of Fixed Deposit

If you are interested in opening a fixed deposit, it is important to know the different options available to you. There are different types of fixed deposits you can choose from to invest your money most appropriately.

  • Standard Fixed Deposit

    A standard fixed deposit is the most popular option for customers in India. It allows individuals to invest their money for a predetermined period at a fixed interest rate. This type of fixed deposit ranges from 7 days to 10 years. This option is very helpful for long-term investment planning and budgeting.

  • Special Fixed Deposit

    This type of deposit is called “Special” because it is only offered for a specific tenure, which usually ranges between 290 and 390 days. A higher interest rate is offered for this type of fixed deposit, which yields greater returns than other fixed deposits.

  • Tax-saving Fixed Deposit

    While standard fixed deposits allow more flexibility, a tax-saving fixed deposit must be locked in for a minimum of 5 years. The deposited amount is exempt from tax under section 80C of the Income Tax Act, 1961. On opening this account, you can claim up to Rs. 1.5 Lakh in tax deductions. However, the interest gained on the invested amount is liable for taxes.

  • Floating Fixed Deposit

    A floating fixed deposit has an interest rate that may change every quarter or annually. These rates move in tandem with reference rates like that of the repo rate of the Reserve Bank of India or fluctuate with changes in market rates.

  • Senior Citizen Fixed Deposit

    Indian citizens over 60 can open a senior citizen fixed deposit. This type of FD offers a higher interest rate- about 0.50% extra in most cases - and often, more flexibility in terms of tenure.

  • Regular Income Fixed Deposit

    Regular income fixed deposits are meant for anyone who has a limited monthly income and wants to utilize the interest offered on the FD for their expenses. A monthly or quarterly payout of interest can be given to this account.

Features of Fixed Deposit

Now that you know the difference between each type of fixed deposit account, here is some information to help you understand the key features of a fixed deposit.

It will allow you to determine if a fixed deposit is a suitable investment tool for you.

1. The interest rate on an FD is higher than on savings accounts.

2. The fixed deposit can be locked in for a period of anywhere between 7 days to 10 years.

3. You can only deposit money in a fixed deposit account once. Any additional amount you want to invest will have to be deposited in a new FD account.

4. A penalty has to be paid if you make withdrawals from a fixed deposit account before the maturity date set in the beginning.

Benefits of Fixed Deposit

1. Attractive Returns

Fixed deposits have higher interest rates than other deposits, like a savings account. Banks offer attractive rates for FD accounts.

2.  Higher safety

One of the most attractive features of a fixed deposit is that you can get assured returns, making it a safe investment. Unlike other investment tools like mutual funds, fixed deposits are not subject to high-risk factors. The Reserve Bank of India monitors it and thus there is minimal risk. You will get the interest rate that is determined at the time of deposit, along with your principal amount, once the FD matures.

3. Nomination facility

The account holder can also set a nominee at the time of opening the FD. This ensures the safety and security of the investment amount.

4. Tax benefit

A tax-saving fixed deposit allows you to claim up to Rs. 1.5 lakh in a year for tax exemption under Section 80C of the Income Tax Act, 1961.

5. Quick loan facility

Banks offer quick loans if you have a fixed deposit of an equivalent or higher amount with them.

6. Multiple accounts

Another benefit is that you can open multiple fixed deposit accounts at the same time.

7. Easy to open

Fixed deposit accounts are easy to open and take only a few minutes. You can open an FD online or walk into a bank branch for assistance.

How to Open an FD account?  

Let’s look at how to open a fixed deposit account at your bank. You can choose between the online or offline facility for this. The exact procedure may vary from bank to bank.

Online

The general process of opening a fixed deposit account online is as follows:

1. Visit the bank's official website where you want to place the deposit.

2. Log in if you are an existing customer. Create a new ID if you are a new customer.

3. Select the Fixed Deposit option.

4. Provide the necessary information, including principal amount, tenure, etc.

5. Confirm the details and make the payment for the principal amount.

6. Download the receipt for any future reference regarding the same.

Offline

The offline process of opening FD is as follows:

1. Visit the branch of the bank in which you wish to open a Fixed Deposit account.

2. If you are an existing customer, fill out the application for the Fixed Deposit and submit it at the branch.

3. If you are a new customer, ask the bank employees what documents you need to submit. Generally, you need to provide identity proof, KYC documents, and address proof along with the application form for opening the Fixed Deposit.

Taxation of FD

Tax is deducted on interest earnings of an FD if it is higher than Rs. 40,000 in a fiscal year. The limit is set at Rs. 50,000 for senior citizen FDs. The Tax Deducted at Source or TDS on FD in India is currently 10%. However, the TDS will be deducted at 20% if the investor does not have PAN linked.

On investing in a tax-saving FD, investors can claim up to Rs. 1.5 lakh per year in tax exemption.

How is the Interest of FD Calculated?

The interest on fixed deposits is calculated depending on whether it is a simple interest FD or a compound interest FD. Interest in a simple interest FD is only earned on the principal invested amount. In a compound interest FD, interest is earned on the principal amount and interest.

Simple interest FD is calculated using this formula:

P + (P x R x T/100)

P = Principal amount deposited

R = Rate of interest per annum

T = Tenure of FD in years

Compound interest FD is calculated using this formula:

P + P {(1 + i/100) t-1}

P = Principal amount invested

i = rate of interest of the period

t = tenure

Who is Eligible for FD?

Mentioned below are entities and individuals with eligibility for opening Fixed Deposits in India:

1. Residents of India

2. Minors

3. Senior Citizens

4. Non-Resident Indians

5. Companies

6. Partnership firms

7. Sole proprietorship firms

8. Clubs, associations, and societies

9. Individual or joint investors

10. Family Trusts

11. Government departments

FAQs about Fixed Deposit

1. What is a fixed deposit, and how does it work?

A fixed deposit is a lump sum deposit for a fixed tenure in a bank, offering a fixed but higher interest rate than savings accounts. One-time deposits are made in the account, and any premature withdrawals require account holders to pay a penalty.

2. What are the key benefits of a fixed deposit account?

Key benefits of an FD include higher interest rates, guaranteed returns on the invested amount, and tax benefits on tax-saving fixed deposit investments. A fixed deposit is very easy to open and requires minimum documentation.

3. Is FD paid monthly?

A fixed deposit is opened with a one-time payment, and the interest payout can be determined at the time. The account holder can determine the payout schedule and receive the interest in regular intervals on a fortnightly, monthly, quarterly, or annual basis.

4. How long should I invest in an FD?

The tenure of the FD depends on whether you want to make a short-term or long-term investment. For instance, if you need a corpus for any investment or payment you need a year from now, put any money lying idle in a 12-month FD. If you want to save money for a long-term financial plan, put aside money in one or multiple FDs for longer tenures.

5. What documentation is required to open a senior citizen Fixed Deposit?

The documents required to open a senior citizen fixed deposit may vary from bank to bank. The primary document required would be proof of age, like an Aadhaar card, passport, voter ID, or driving license. Others may include a PAN card, application form, passport-size photographs, and Form 15H.

6. Is Age Proof required for all the subsequent deposits?

Yes, unless the customer already has a live senior citizen fixed deposit at the same bank.

7. Is FD transferable?

No, FDs are not transferable from one bank to another. The primary FD must be closed to withdraw the amount and open an FD in another bank. 

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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What is a Fixed Deposit?

What is a Fixed Deposit?

What is a fixed deposit (FD)? Understand its meaning, benefits, and why it is a crucial financial tool. Explore the advantages of having an FD account.
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