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Fixed Deposit (FD) – A favourite for generations

What is a fixed (or term) deposit? What are its features? Where can you open an FD? Should you invest in an FD? This article explains it all.

I can’t think of anyone who would not have heard of a fixed deposit. After all, it has been a favorite investment avenue for us Indians for ages!

Most of us invest in FDs. So, in line with the philosophy of knowing the various investment avenues well, let’s understand what an FD is.

How does a fixed deposit (FD) work?

In an FD, you deposit an amount with the bank for a fixed duration.

You earn a fixed rate of interest on this investment. The interest rate is fixed at the time of the investment – even if interest rates change during the tenure of the FD, the interest that you earn on your FD remains fixed. (The interest is not floating)

Thus, you invest a fixed amount, for a fixed duration, and earn a fixed interest on it. No wonder, it is called a fixed deposit!

(An FD is also called a Term Deposit at times, as it is an investment for a pre-defined term)

Duration / Tenure of a Fixed Deposit

The tenor of an FD can be anywhere from 15 days to 10 years.

Interest Rate

The rate of interest offered on an FD depends on various parameters: the prevailing interest rates, the duration of the FD, the amount of the FD, your age, etc.

Usually, the longer the tenure of the FD, the higher is the interest rate.

Most banks offer a higher rate of interest on FDs of more than a certain amount, usually Rs. 15 Lakhs.

Also, most banks offer an extra 0.5% per annum to Senior Citizens.

How do you get the interest?

You have two options for receiving the interest from an FD.

1. Periodic Interest: You can choose to receive the interest monthly, quarterly or half yearly. In this case, the interest would be deposited to your bank account every month / quarter / 6 months, and your invested amount would be credited to your bank account at the time of maturity.

If you opt for receiving the interest periodically, you would earn only a simple interest on your investment. That is, you would earn interest on your original investment, but not on the interest that you earn form it.

2. Cumulative: You can choose to receive the interest at the time of maturity of the FD. In this case, the invested amount and the interest would be deposited to your bank account at the time of maturity of the FD.

When you opt for cumulative interest, you earn compound interest on your investment. That is, you earn interest not only on your original investment, but also on the interest earned on it. (This is because such interest is automatically reinvested in the FD by the bank)

Proof of an FD

When you open an FD, you receive a certificate that mentions the invested amount, the interest rate and the maturity date, apart from some other details.

If you opt for the cumulative option for getting the interest, the maturity amount would also be mentioned on the FD certificate.

If you open an FD online through the internet banking facility of your bank, you might not receive an FD certificate. In such cases, it would be there as an entry in your online account.

Early withdrawal / Breaking an FD

Although you invest for a fixed duration, you can withdraw the amount earlier than the maturity date. This is called “breaking” the FD.

All banks allow breaking an FD. They usually have some penalty for this – either in the form of a reduced interest rate, or a charge as a percentage of the invested amount.

Income Tax and Fixed Deposits

Is there any income tax benefit for investments made in FDs? Yes, there is.

Investments made in FDs with a duration of 5 years or more enjoy the benefits of section 80C – the amount invested in deductible from your income.

(To know more about tax saving FDs, please read “Fixed Deposits (FD) for saving income tax through section 80C“)

(Please read “Saving Income Tax – Understanding Section 80C Deductions” to know all about deductions u/s 80C)

Apart from this, one thing that needs to be kept in mind is that if the interest earned from FDs kept by you in a single branch is more than Rs. 10,000 in a financial year, the banks deducts income tax on it – there is a Tax Deducted at Source (TDS) at the rate of 10% of the interest.

(Confused by terms like financial year and assessment year? Please read “Income Tax (IT) Jargon – Financial Year (FY), Assessment Year (AY) and Previous Year (PY)”)

Please not that TDS is applicable only if the interest income exceeds Rs. 10,000 from a single branch.

At the end of the year, the bank issues you a certificate (Form 16A) that mentions the income tax withheld by it on the interest that you earned on your FD. When you fill your IT return, you can claim this as tax already paid by you.

Who offers fixed deposits?

Ok, so where can you open a fixed deposit account?

Well, the most popular option is banks. All banks offer FDs, so that is an obvious option.

Apart from banks, post offices in India also offer FDs. Please read “Post Office Time Deposit Account (Fixed / Term Deposit)” for the details on fixed deposits offered by post offices.

Many companies also offer fixed deposits. These are known as company FDs, and are issued from time to time by various corporations.

Safety / Risk Evaluation

The fixed / term deposit offered by the post office is risk free, as it is guaranteed by the Government of India.

FDs with banks are also quite safe, as banks are heavily regulated by the RBI. An FD in a cooperative bank would be considered riskier than an FD in other banks, though.

Please note that FDs are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This insurance is available upto Rs. 1 Lakh per person per bank branch.

Thus, even if you have 5 FDs of Rs. 50,000 in the same bank branch, you would be insured only upto Rs. 1 Lakh in all. But if you have 5 FDs of Rs. 50,000 in different branches of the same bank, or in different banks, the entire amount of Rs. 2.5 Lakh would be insured (as Rs. 1 Lakh per person in a per-branch limit).

Company FDs are the riskiest among all FDs.

Is a fixed deposit right for you?

Post Office (PO) and Bank FDs – which are much more popular than company FDs – are quite safe.

Thus, these are a good investment avenue for you if you are risk averse.

But please keep in mind that being low risk, FDs also offer a lower return – the return from FDs can beat inflation only by a small margin. Therefore, you should not park all your money in FDs.

The money that you want to keep aside for an emergency / contingency find can be kept in an FD.

(Please read “Why you should have a contingency / emergency fund” to know why and how you should build an emergency fund)

Also, amount that you want to invest for a short term can also be invested in FDs.

Apart from that, try to stay away from FDs and invest in high-growth investment avenues like stocks that would help you build your wealth.

(Please read “Stocks – The winning bet for the long term” to know more about investing in stocks)

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