A fixed deposit (FD) is a type of investment offered by banks and other financial institutions that allows you to deposit a lump sum amount for a fixed period of time. It is a secure and low-risk investment option that provides a guaranteed rate of interest for the entire tenure of the deposit.
When you open a fixed deposit account, you agree to keep your money invested for a specific duration, ranging from a few months to several years. In return, the bank pays you interest on the deposited amount at a predetermined rate. The interest rate offered on fixed deposits is usually higher than that of a regular savings account, making it an attractive option for those looking to grow their savings.
Fixed deposits are considered a safe investment because the principal amount is not exposed to market risks, and the interest rate remains fixed throughout the tenure, providing a stable and predictable return on your investment. This makes fixed deposits a popular choice for individuals with a low-risk appetite or those seeking a reliable source of income.
How Does a Fixed Deposit Work?
1. Principal Amount and Tenure: When opening an FD, you choose the principal amount you wish to deposit and the tenure or duration for which you want to invest. The tenure can range from a few months to several years, depending on the bank’s offerings.
2. Interest Rate: The bank assigns a fixed interest rate to your FD, which remains constant throughout the tenure. The interest rate is usually higher than that offered on regular savings accounts, as your money is locked in for a specific period.
3. Interest Calculation: The interest on your FD is calculated based on the principal amount, the interest rate, and the tenure. Most banks offer the option of simple interest or compound interest calculation, with the latter typically yielding higher returns.
4. Interest Payout: You can choose to receive the interest earned on your FD at regular intervals (monthly, quarterly, or annually) or opt for the interest to be compounded and paid out along with the principal amount at maturity.
5. Maturity: At the end of the tenure, the FD matures, and you receive the principal amount along with the accumulated interest. You can choose to withdraw the entire amount or renew the FD for another tenure, often at a different interest rate.
6. Premature Withdrawal: While FDs are designed for a fixed tenure, some banks allow premature withdrawal of the deposit before maturity. However, this usually attracts a penalty charge, and the interest earned may be lower than the advertised rate.
How Is Interest on FDs Calculated?
The interest on fixed deposits (FDs) is typically calculated based on a simple or compound interest method, depending on the scheme chosen by the customer. Both methods have their own advantages and implications on the overall interest earned.
Simple Interest Calculation
In the simple interest calculation method, the interest is calculated based on the principal amount, the rate of interest, and the tenure of the deposit. The formula for simple interest is:
Simple Interest = (Principal Amount × Rate of Interest × Tenure) / 100
For example, if you invest ₹1,00,000 in an FD at 6% interest rate for 3 years, the simple interest calculation would be:
Simple Interest = (₹1,00,000 × 6 × 3) / 100 = ₹18,000
At the end of the tenure, you would receive the principal amount (₹1,00,000) plus the simple interest (₹18,000), totaling ₹1,18,000.
Compound Interest Calculation
The compound interest calculation method is more beneficial for investors as the interest earned is reinvested, and interest is calculated on the principal amount plus the accumulated interest from previous periods. The formula for compound interest is:
Compound Interest = Principal Amount × [(1 + Rate of Interest/100)^Tenure – 1]
Using the same example as above, if you invest ₹1,00,000 in an FD at 6% interest rate for 3 years, compounded annually, the compound interest calculation would be:
Compound Interest = ₹1,00,000 × [(1 + 6/100)^3 – 1] = ₹19,262.40
At the end of the tenure, you would receive the principal amount (₹1,00,000) plus the compound interest (₹19,262.40), totaling ₹1,19,262.40.
Who Should Invest in an FD?
Individuals with Low-Risk Appetite: FDs are among the safest investment options, as they offer assured returns with minimal risk exposure. If you have a low-risk tolerance and prioritize capital preservation over high returns, FDs can be an ideal choice for you.
Retirees and Senior Citizens: After retirement, many individuals prefer to invest in low-risk instruments that provide a steady income stream. FDs can serve as a reliable source of periodic interest income, making them suitable for retirees and senior citizens who may have limited earning capacity.
Short-Term Investors: FDs are well-suited for those with short-term financial goals, such as saving for a down payment, vacation, or emergency fund. With tenures ranging from a few months to several years, FDs offer flexibility in aligning with your specific time horizon.
Individuals with Surplus Funds: If you have surplus funds that you don’t immediately need for expenses or investments, parking them in an FD can be a sensible option. FDs allow you to earn higher interest rates compared to regular savings accounts, making them an attractive choice for surplus funds.
Conservative Investors: While FDs may not offer the highest returns, they provide a sense of stability and predictability. If you have a conservative investment approach and prefer to avoid the volatility associated with stock markets or other high-risk investments, FDs could be a suitable addition to your portfolio.
Types of Fixed Deposits
1. Cumulative Fixed Deposits: In this type, the interest earned on the principal amount is compounded and reinvested along with the principal. The maturity amount includes both the principal and the accumulated interest.
2 .Non-Cumulative Fixed Deposits: Unlike cumulative FDs, the interest earned on non-cumulative FDs is paid out periodically, typically quarterly or annually, while the principal remains intact until maturity.
3. Tax-Saver Fixed Deposits: These FDs are specifically designed to help individuals save on income tax under Section 80C of the Income Tax Act. The invested amount, up to a specified limit, is eligible for tax deductions.
4. Recurring Deposit (RD): An RD is a type of fixed deposit where the investor makes regular, fixed contributions (monthly, quarterly, or annually) over a predetermined period. The maturity amount includes the total contributions plus the interest earned.
5. Sweep-in Fixed Deposits: Some banks offer sweep-in FDs, where surplus funds from a savings account are automatically swept into a fixed deposit account, earning higher interest rates than regular savings accounts.
6. Senior Citizen Fixed Deposits: Banks often offer higher interest rates on fixed deposits for senior citizens, providing them with an additional source of income during their retirement years.
7. NRI Fixed Deposits: Non-Resident Indians (NRIs) can invest in NRI fixed deposits, which are denominated in Indian rupees or foreign currencies and offer attractive interest rates.
8. Company Fixed Deposits: In addition to banks, certain companies also offer fixed deposits to raise funds, which may provide higher interest rates than bank FDs but carry a higher risk.
Benefits of Fixed Deposits
1. Safe and Secure Investment: Fixed Deposits are considered one of the safest investment instruments, as they are backed by the financial strength of the bank or financial institution offering them. Your principal amount is guaranteed, making FDs a low-risk investment option.
2. Fixed and Guaranteed Returns: FDs provide fixed and predetermined returns, which are guaranteed by the bank or financial institution. This feature allows investors to plan their financial goals accurately and achieve their desired corpus at maturity.
3. Liquidity: Although FDs have a fixed tenure, many banks offer premature withdrawal facilities, allowing investors to access their funds before maturity if needed. However, premature withdrawals may attract penalties or reduced interest rates.
4. Tax Benefits: Interest earned on FDs is subject to tax deduction at source (TDS), but the interest income can be used to claim tax deductions under Section 80C of the Income Tax Act, up to a certain limit, which can help reduce your overall tax liability.
5. Variety of Tenures: FDs are available for various tenures, ranging from a few months to several years. This flexibility allows investors to choose the tenure that aligns with their financial goals and liquidity requirements.
6. Loan Facility: Many banks offer overdraft or loan facilities against FDs, allowing investors to meet their short-term financial needs without breaking their investment.
7. Compound Interest: FDs offer the option of compounding interest, which means that the interest earned is reinvested, and the subsequent interest is calculated on the principal amount plus the accumulated interest. This compounding effect can significantly increase the overall returns over the tenure of the FD.
8. Inflation Hedge: While FDs may not provide inflation-beating returns, they can still serve as a hedge against inflation, especially for risk-averse investors who prioritize capital preservation over higher returns.
How to Open Fixed Deposit (FD) Account?
1. Choose a Bank: Decide which bank you want to open your FD account with. Consider factors like interest rates, customer service, and accessibility of branches or online banking facilities.
2. Gather Required Documents: Typically, you’ll need to provide a few basic documents, such as your identity proof (e.g., Aadhaar card, PAN card, or passport), address proof, and a recent passport-sized photograph.
3. Visit the Bank Branch: If you prefer a more personal approach, visit the nearest branch of the bank you’ve chosen. Alternatively, many banks now offer the convenience of opening an FD account online or through their mobile banking app.
4. Fill Out the Account Opening Form: The bank will provide you with an account opening form, where you’ll need to enter your personal details, such as your name, date of birth, contact information, and the desired tenure and amount for the fixed deposit.
5. Submit Documents and Initial Deposit: Along with the completed form, you’ll need to submit the required documents and make the initial deposit for the fixed deposit amount.
6. Receive Account Details: Once the account opening process is complete, the bank will provide you with the fixed deposit account details, including the account number, interest rate, and maturity date.
How to Invest in a Fixed Deposit?
1. Choose a Bank: Decide which bank you want to open an FD with based on their interest rates, credibility, and accessibility. Many banks now allow you to open an FD online or through their mobile app.
2. Decide on Deposit Amount: Determine how much you want to deposit into the FD account based on your savings goals and investment capacity. Most banks have a minimum deposit amount requirement.
3. Select Tenure: Fixed deposits are offered for different tenure periods, usually ranging from 7 days to 10 years. Longer tenures generally fetch higher interest rates.
4. Submit Required Documents: You’ll need to provide some basic KYC documents like identity proof, address proof, PAN card details, cancelled cheque, etc. This can often be done online now.
5. Make the Deposit: Once your documents are verified, you can transfer the deposit amount from your existing account to open the new FD account.
6. Get FD Receipt: The bank will issue you an FD receipt with all the important details like deposit amount, tenure, interest rate, maturity date and value.
7. Let it Earn: Sit back and let your money grow tax-efficiently until maturity as per the contracted rate of interest.
How to Open Fixed Deposit (FD) Account?
1. Choose a Bank: Decide which bank you want to open your FD account with. Consider factors like interest rates, customer service, and accessibility of branches or online banking facilities.
2. Gather Required Documents: Typically, you’ll need to provide a few basic documents, such as your identity proof (e.g., Aadhaar card, PAN card, or passport), address proof, and a recent passport-sized photograph.
3. Visit the Bank Branch: If you prefer a more personal approach, visit the nearest branch of the bank you’ve chosen. Alternatively, many banks now offer the convenience of opening an FD account online or through their mobile banking app.
4. Fill Out the Account Opening Form: The bank will provide you with an account opening form, where you’ll need to enter your personal details, such as your name, date of birth, contact information, and the desired tenure and amount for the fixed deposit.
5. Submit Documents and Initial Deposit: Along with the completed form, you’ll need to submit the required documents and make the initial deposit for the fixed deposit amount.
6. Receive Account Details: Once the account opening process is complete, the bank will provide you with the fixed deposit account details, including the account number, interest rate, and maturity date.
How to Invest in a Fixed Deposit?
1. Choose a Bank: Decide which bank you want to open an FD with based on their interest rates, credibility, and accessibility. Many banks now allow you to open an FD online or through their mobile app.
2. Decide on Deposit Amount: Determine how much you want to deposit into the FD account based on your savings goals and investment capacity. Most banks have a minimum deposit amount requirement.
3. Select Tenure: Fixed deposits are offered for different tenure periods, usually ranging from 7 days to 10 years. Longer tenures generally fetch higher interest rates.
4. Submit Required Documents: You’ll need to provide some basic KYC documents like identity proof, address proof, PAN card details, cancelled cheque, etc. This can often be done online now.
5. Make the Deposit: Once your documents are verified, you can transfer the deposit amount from your existing account to open the new FD account.
6. Get FD Receipt: The bank will issue you an FD receipt with all the important details like deposit amount, tenure, interest rate, maturity date and value.
7. Let it Earn: Sit back and let your money grow tax-efficiently until maturity as per the contracted rate of interest.
Way to Invest in Fixed Deposit
1. Choose a Bank: Decide which bank you want to open the FD with based on their interest rates, minimum deposit amounts, tenures offered and credibility.
2. Gather Documentation: You’ll need to provide some basic KYC documents like your PAN card, Aadhaar card, address and identity proofs.
3. Open Account: You can open a new account by visiting the branch or doing it online through net banking if you’re an existing customer.
4. Transfer Funds: Deposit the lump sum amount you wish to invest in the new FD account via cash, cheque or electronic transfer.
5. Set Tenure: Fix the investment period or tenure you want to lock-in your funds for – popular tenures are 1-5 years.
6. Note Details: Make a note of the FD receipt number, maturity date and interest payout frequency (monthly/quarterly/yearly).
7. Renewal: At maturity, you can choose to renew the FD for the same or a different tenure.
Eligibility of FD (Fixed Deposit)
- Eligibility criteria for opening a fixed deposit (FD) account are generally straightforward and inclusive across banks. Any individual, regardless of age or occupation, can open an FD account by fulfilling a few basic requirements. Additionally, certain entities like companies, trusts, and Hindu Undivided Families (HUFs) are also eligible.
- For individuals, the primary requirement is a valid identity and address proof document like Aadhaar card, PAN card, voter ID, passport, or driving license. Banks may also ask for photographs and signature specimens.
- Minors can open FDs under the guardianship of their parents or legal guardians. In such cases, the guardian’s KYC documents are required along with the minor’s birth certificate.
- Non-Resident Indians (NRIs) and Persons of Indian Origin (PIOs) are eligible to open NRI/NRO or NRE fixed deposits with supporting documents like passport copy, visa details, and overseas address proof.
- Existing customers of a bank can usually open an FD by providing minimal documentation since their KYC is already on record.
- Most banks have no maximum age limit for FD investors, making it an attractive investment option for senior citizens seeking safe returns.
Taxation on FDs
- Taxation on fixed deposits is an important aspect to consider when investing in these instruments. The interest earned on fixed deposits is subject to tax deduction at source (TDS) according to the prevailing income tax rules. However, the taxation rules may vary depending on factors such as the investment amount, the investor’s age, and the tax regime chosen.
- For individuals below the age of 60 years, TDS is deducted at the rate of 10% on the interest earned from fixed deposits if the total interest income from all sources exceeds the threshold limit set by the Income Tax Department. This threshold limit is currently set at ₹40,000 for the financial year 2023-24.
- For senior citizens aged 60 years or above but below 80 years, the TDS rate is also 10%, but the threshold limit for TDS deduction is higher at ₹50,000.
- For super senior citizens aged 80 years or above, the TDS rate is also 10%, and the threshold limit for TDS deduction is even higher at ₹60,000.
- It’s important to note that TDS is a preliminary tax deduction, and the actual tax liability may vary based on the individual’s overall taxable income and the applicable income tax slab rates. Individuals whose total income falls below the basic exemption limit may be eligible for a refund of the TDS deducted.
- Additionally, interest income from fixed deposits is also subject to surcharge and cess, as applicable, based on the individual’s total taxable income.