• Fixed Deposit (FD)

    Fixed deposit accounts are ideal for investors who are averse to taking risks. Interest is accumulated on the deposited amount over a fixed period of time. The interest rate for deposits less than Rs.2 crore range from 3.00% p.a. (for deposits less than one year) to 9.54% p.a. (for deposits of up to 10 years). This depends on the type of financial institution as well (public sector, private sector, or small finance banks). The tenure can range from 7 days to 10 years. Senior citizens are offered higher interest rates. This is usually in the range of 0.25% to 0.65% more than the existing rates.

    How Does a FD Account Work?

    When you put your money to work in fixed deposits, you basically lock the amount for a fixed period of time. You can earn interest on the principal sum throughout the tenure on a cumulative basis. The interest earned gets added to the principal amount after every specific interval.

    Since the tenures are flexible, you have the option to manage multiple FD accounts spread across different tenures. That way, you will be able to earn more on your investments. Senior citizens are eligible for additional rates, usually 0.25% to 0.65% more than the existing rate.

    Other than this, even NRIs (Non-resident Indians) can open FD accounts in India in the form of NRE (Non-resident External) and NRO (Non-resident Ordinary) FDs.

    You can open a term deposit account with a bank where you already have a savings account. There are banks that let you open an FD account even if you don’t have a savings account with that bank. However, with such banks, you have to go through a KYC process where you have to present relevant documents, including ID proof, address proof, passport size photographs, among others.

    Types of Fixed Deposits

    • Normal Fixed Deposits
      • Deposit money for a fixed tenure.
      • Tenure can range from 7 days to 10 years.
      • Interest rates higher than a normal savings account.
    • Tax-Saving Fixed Deposits
      • Tax exemption on the principal deposit amount of up to Rs.1.5 lakh in a calendar year.
      • Lock-in period of 5 years within which you cannot withdraw the amount.
      • Allows only one-time lumpsum deposit.
    • Senior Citizen Fixed Deposits
      • Applicable for individuals above 60 years of age.
      • Senior citizens are eligible for special rates.
      • Flexible tenures.
    • Cumulative Fixed Deposits
      • Interest is compounded every quarter or year and paid at the time of maturity.
      • Helps substantially grow your savings.
    • Non-Cumulative Fixed Deposits
      • Interest is paid out monthly, quarterly, half-yearly, or annually, as per your choice.
      • Better bet for pensioners looking for a regular source of income.
    • Flexi Fixed Deposits
      • Fixed deposit linked to your bank account.
      • Money shuttles between your FD and savings account.

    Features of a Fixed Deposit Account

    • Safer than other investment vehicles.
    • Lets you earn interest over a fixed period of time.
    • Flexible tenures of up to 10 years.
    • No cap on the maximum deposit.
    • Additional rates for senior citizens.

    Eligibility Criteria for FD investment

    The following entities are eligible to open an FD account in India:

    • Indian resident
    • NRI
    • Minors
    • Senior citizens
    • Companies
    • Partnership firms
    • Individuals or joint investors
    • Societies or clubs
    • Sole proprietorship

    Documents Required for opening an FD account

    The documents required for opening an FD account are as given below:

    • Proof of identity: Voter ID, PAN card, Aadhaar card, driving license, photo ration card, senior citizen ID card, etc.
    • Proof of address: Utility bills, bank statement with cheque, Post-office issued identification card or certificate, etc.

    Fixed Deposit Application Form

    You can obtain the application form to open a fixed deposit by:

    • Visiting the nearest branch of the bank that you wish to open your FD in.
    • Download the application form from the official website of the bank that you wish to open an FD account in.

    Fixed Deposits for NRIs

    For Non-resident Indians, there are two types of accounts they can open with Indian banks—Non-resident External account (NRE) and Non-resident Ordinary account (NRO).

    NRE Fixed Deposit

    NRE FDs are beneficial for those earning in foreign currency and who would like to get the amount converted to the value of Indian currency. Some of the major highlights for an NRE FD account is that the interest earned is tax-free and both the principal and the interest amount are completely repatriable. The only pitfall is that the money deposited can get affected due to currency rate fluctuations.

    NRO Fixed Deposit

    Unlike NRE FDs, the interest earned through NRO FDs is taxable based on the income tax category. Wealth and gift tax are also applicable. However, reduced tax benefit can also be availed under the Double Taxation Avoidance Agreement (DTAA).

    Also, only the interest earned can be completely repatriated, but the principal amount can be repatriated within a certain bracket or set limit. However, the plus point is that in case of NRO fixed deposits, there are no exchange rate fluctuation risks. You can deposit money in foreign or Indian currency in case of NRO accounts. So, if you are staying abroad and your total income also includes earnings from India, NRO FDs can be an effective gateway to manage your funds within India.

    How to Choose the Right Fixed Deposit

    Here are the factors to look into when choosing a fixed deposit:

    1. Compare the FD interest rates of different banks.
    2. Review the credibility of the lender by examining the fixed deposit’s safety rating as given by ICRA or CRISIL.
    3. Choose whether you want a cumulative or non-cumulative fixed deposit.
    4. Choose a bank that offers good customer service and a hassle-free process for opening an FD.

    Advantages of Fixed Deposit

    Fixed deposits have several advantages, some of which are:

    • Low risk: Market risks do not affect the returns on your fixed deposits.
    • Insurance: Your deposits are insured for up to Rs.1 lakh by the RBI.
    • Loan against FD: You can avail loans of up to 90% of your deposit amount at very low interest rates. This will usually be around 2% more than the FD interest rate.
    • Easy liquidity: In the case of an emergency, you can easily liquidate your FD and release the funds.
    • Regular income: You can get the interest sum credited as per your requirements on a monthly, quarterly, or annual basis.
    • Tax benefits: Investing in tax-saving fixed deposits will fetch you tax deductions of up to Rs.1.5 lakh in a financial year.
    • Senior citizens: Senior citizens are offered a higher interest rate compared to regular customers.
    • Earn interest on your deposits and see your wealth grow.
    • Flexible tenures.

    Who should Invest in Fixed Deposits?

    Fixed deposits offer both protection of a fixed amount as well as a regular flow of income. This makes it is ideal for those who have a lump-sum amount that they do not need to use for some time. It is also the right financial product for those who are risk averse as the returns are not subject to market risks but offer a fixed rate of interest throughout.

    How to open a Fixed Deposit

    You can open an FD in two ways: online and offline.

    Online: To open an FD account online, it would be easiest to do so with the bank where you already have an account. All you have to do is use the net banking facility, fill up the online form for opening an FD, and submit it. In such cases, KYC will not be required as your bank will already have the details. You can transfer the funds through your account using the internet banking facility.

    Offline: Visit the nearest branch of your bank and fill up the application form for opening an FD account. Submit it to the concerned official with the required documents. Deposit the required amount and you will receive the FD receipt.

    Fixed Deposit Tax Benefits

    There are many benefits to Tax Saving Fixed Deposits. These are as given below:

    1. Individuals, Hindu Undivided Family (HUFs), and minors investing jointly with adults can invest.
    2. The investment qualifies for tax deduction under Section 80C of the Income Tax Act.
    3. Tax Deducted at Source (TDS) is applicable on the interest earned, according to the income tax bracket, but this can be avoided by submitting Form 15G (for senior citizens it is Form 15H).
    4. Senior citizens can claim deduction of up to Rs.50,000 on interest earned under Section 80TTB.
    5. Nomination facility can be availed except if it is held by or on behalf of minors.
    6. Higher interest rates are offered for senior citizens.
    7. Fixed deposits in post offices can be transferred from one post office to another.

    FD Calculator

    To find out how much interest your fixed deposit will yield for a specific tenure, you can use a free online compound interest calculator. Based on the rate of interest, the FD Calculator will determine how much your deposit will yield at maturity depending on the principal amount. This is calculated based on several factors including the interest compounding frequency which would depend on the bank. It can be on a monthly, quarterly, half-yearly, or annual basis.

    How FD rates of interest vary with Central Bank policy

    The Reserve Bank of India lends to banks at interest rates that can vary based on the prevailing economic conditions. When interest rates are revised by the RBI, banks too may change the interest rates offered on their fixed deposits. This can increase or decrease based on the repo rate (the rate of interest at which the RBI lends to banks).

    FAQs on Fixed Deposit (FD)

    1. What is the minimum amount required to open a fixed deposit?

      The minimum amount required to open a fixed deposit can range from Rs.1,000 (in State Bank of India) to Rs.5,000 (in Axis Bank).

    2. Can I withdraw an FD at any time?

      Yes, you can withdraw your FD at any point in time unless the bank has a lock-in period.

    3. What’s the maximum amount that can be deposited?

      There’s no upper cap for fixed deposits. However, you can check with your lender to see if there are any set limits.

    4. How many years FD will double?

      The fixed deposit can be doubled depending on the rate of interest that is being offered.

    5. Is fixed deposit risk free?

      Yes, it is risk free and provides returns that are guaranteed.

    6. Can I double my money in 5 years?

      This will depend on the rate of interest being offered and if it remains consistent throughout the five years.

    7. Can I get monthly interest on FD?

      Your FD interest can be compounded monthly, quarterly, half-yearly or annually as per your choice. However, frequent compounding can reduce the rates.

    8. Can a 5-year tax-saver FD be broken?

      A 5-year FD cannot be broken before its tenure of 5 years is completed.

    9. What is the minimum period for a fixed deposit?

      Your FD tenure can range from 7 days to 10 years depending on the term you choose.

    10. Is fixed deposit safe?

      Yes, fixed deposits are safe because the returns are not affected by fluctuations in the stock markets. Also, the Reserve Bank of India provides insurance for up to Rs.1 lakh of your fixed deposit in the event of a banking crisis.

    11. Is FD tax free?

      No, it’s not tax free. However, you can get tax exemptions if you opt for tax-saving fixed deposits. Under such FDs, you can claim a deduction of up to Rs.1.5 lakh under section 80C of the Indian Income Tax Act, 1961.

    12. How does a fixed deposit work?

      In a fixed deposit, your money is locked away for a fixed period of time in a bank. The principal amount that is deposited earns you interest on a cumulative basis.

    13. What happens if I break my fixed deposit before the maturity period is over?

      If you break your fixed deposit before the maturity period is over, you will get a lower rate of interest and a penalty will be deducted from the amount before it is given back to you.

    14. What happens to FD after maturity?

      While opening an FD, you can mention that after maturity the amount can be transferred to your savings account. Or you can mention in the form that the amount to be renewed after maturity. If you choose the second option, after maturity, the amount will be reinvested as fixed deposit with the same tenure and rates as the previous one. If nothing is notified in the form, the concerned lender will notify you. In case you don’t respond within 14 days after FD maturity, your account will be renewed automatically.

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