All you need to know about Fixed Deposit
A Fixed deposit is a financial instrument that is provided by banks or non-bank financial institutions. Through an FD investors can earn a higher rate of interest than a regular savings account within a fixed period of time and at a predetermined rate of interest. The rate of interest varies from one financial institution to another.
Fixed deposits are also known as term deposits. Its tenure can vary ranging from short-term tenures of 7-14 days to long tenures of 10 years.
How does a Fixed Deposit work?
Investing in an FD is like lending money to a bank or NBFC, getting in return the invested sum along with the interest from the financial institution on the maturity date. The bank uses this money to lend to other borrowers for which it charges interest from them. This interest amount is used for paying interest to the original lenders i.e. bank’s account holders.
An investor can either reinvest the interest or receive an interest periodically in their bank account:
- Cumulative FD’s
In this case the investor is paid the principal and interest at the time of maturity and this interest is then reinvested every year. It means there will be no regular pay outs as the investor will receive a lump sum amount at the end of the tenure only.
This type is best suited in case when an investor does not requires a regular stream of income. Also, it follows the compounding method as the next year’s interest would be calculated on the total of principal plus the interest of the previous year.
- Non-Cumulative FD’s
In this case an investor receives interest at a regular interval. It is up to investor’s discretion whether to choose the interval to be monthly, quarterly, half- yearly or annually, depending on their requirements.
The benefit of this type is it provides a regular stream of income. But it also has a disadvantage that investor will not be able to get interest on compounding basis in this case.
How is the interest on FDs calculated?
The basic formula to calculate interest on the FD is:
Interest on FD = Amount invested × Interest Rate × (Duration/ 12 months)
However, the interest amount varies depending upon the type of FD, i.e. whether it is cumulative or non-cumulative. Let’s understand it in a better way with the help of an example:
If INR 25000 is invested for 3 years at an interest rate of 7.1% per annum, a cumulative FD would have a maturity amount of INR 30712.
|Year||Principal Amount||Interest Earned at 7.1% p.a.||Amount at the End of Year|
And, in the case of non-compounding FD, the interest will be paid out periodically and not on compounding basis.
Who should invest in FD?
As we know while investing in an FD, the duration i.e. tenure of investment and the interest amount is well known which assures return on maturity, making FDs a safe investment option.
Below mentioned are the objectives of investment that are fulfilled by FDs:
- Low Risk: Fixed Deposits provide higher return as compared to return on savings account. People who believe in low risk investment can blindly invest in FDs.
- Meets short term goals: As the returns are assured and the volatility is low it helps in meeting short term goals. Also, its tenure can vary ranging from short-term tenures of 7-14 days to long tenures of 10 years.
- Stability: For pensioners, it is the best choice, as it ensures stability of investment.
- Balances risk: It helps balancing the risk of an overall portfolio i.e. investing a part of the overall funds in fixed deposits balances the risks associated with other market linked instruments in the portfolio like equity or mutual funds.
How to invest in a Fixed deposit?
An FD can be opened in any of the preferred financial institution by visiting the home branch of the bank during the bank timings or NBFC’s. Below mentioned are some easy steps for the same:
- Fill the FD details like Amount of FD, Tenure, and the Interest payout method.
- Set up the investment account by answering to some simple questions.
- Make the payment.
Taxation on FD’s:
Only the interest part on Fixed Deposit is taxable which will be charged at the applicable slab rate under the head of “Income from Other Sources”. But the TDS would be deducted at the rate of 10% per annum from the interest. TDS on interest income is deductible in case the total interest is above INR 40000 per annum and INR 50000 in case of senior citizens.
Benefits of FDs:
Below mentioned are the benefits of FDs:
- Assured Return
- Low Minimum Investment
- Easy Process
- Higher rates for Senior Citizens
- Balances the portfolio
- Suitable for short term goals
- Net value remains positive
Types of Fixed Deposits
- Standard Time Deposits
- Senior Citizen Fixed Deposit
- Tax Saving Fixed Deposit
- Recurring Deposit
- Flexi Fixed Deposit
- Fixed Deposit for Non Resident Indians
- Corporate Fixed Deposits
Best Fixed Deposits Rate Offered
The interest rates on FDs are higher in the private sector banks and NBFCs as compared to public sector banks. Below mentioned is the list of the same:
|Name||Bank/ NBFC||Regular FD Rate||Senior Citizen FD rate|
|State Bank of India||Public Sector Bank||3.00-6.10%||3.50-6.90%|
|Punjab National Bank||Public Sector Bank||3.50-6.10%||4.00-6.90%|
|ICICI Bank||Private Bank||3.00-6.60%||3.50-7.10%|
|HDFC Bank||Private Bank||3.00-6.25%||3.50-7.00%|
- What happens in case of premature closure of FD?
In case of emergencies, many banks provide the option to brake FD before maturity. But the premature withdrawal in case of tax saving FDs are not permitted. It also carry a small penalty and forfeiture of interest for the remaining duration.
- Who all are eligible to open a FD?
- Individuals, who are citizens of India
- Minors, with parental or guardian consent
- Non-resident Indians
- Sole proprietorship, partnership firms, public or private companies
- Hindu Undivided Families
- Statutory Board or Local Authorities
- Registered societies like foundations, clubs or associations