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.
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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)
Other articles you might be interested in:
- Post Offices – Another source for Gold Coins
- An introduction to Post Office (PO) Recurring Deposit (RD) Account
- “RaagVamdatt.com – Financial Planning Demystified” Completes One Year
- An introduction to Recurring Deposit
- Banks in India hike interest rate on FCNR, NRE deposits
- Post Office Schemes: Downloadable Forms
- Understanding a Fixed Maturity Plan (FMP)
- Banks in India start cutting lending and deposit rates
- An introduction to Short Selling
- Money Fundamentals: Spending, Investing, Credit, Debt
- ICICI Bank hikes interest rates on home loans
- Why you should not stop your SIP when market corrects
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hi
i have taken a FD in bank for 399 days.
is the interest income from it after 399 days , a long term capital gain or short term capital gain
Hi Rangarajan,
An FD is not a capital asset. The interest income from your FD would be included in the “Other Income” section of the IT return.
Hi,
The TDS is on the entire interest amount, and not just the interest amount over Rs. 10,000.
However, your interest is Rs. 11,209 over a period of more then 1 year – although you would be getting it in 2011, you would be earning it in different financial years – FY2008-09, FY2009-10 and FY2010-11.
Thus, for TDS, the bank would consider interest earned in each of the financial years individually, and there would be a TDS only if the interest in a single year is over Rs. 10,000 (which would not be the case in your FD).
Dear RaagVamdatt,
I have done a FD of 81K with 9% pa cumulative.Now interest received in 2011 would be Rs 11209.
I want to know whether TDS of 10.3% would be appliacble on 11209 or on (11209-10000)=1209
Hi Mehul,
Thanks – I am glad that you like the site.
There is no limit on the amount of fixed deposit you can have in the name of your wife. So, invest as much as you want to! Of course, depending on the interest earned, your wife might have to file an income tax return going forward.
I would write an article on forms 15G and 15H – thanks for an excellent article idea!
hi,
This is very informative site. I would like to invest in Fixed Deposit for my wife .I am not filing her returns yet. IF u can explain us how much can i invest for my wife’s name in india. Currently i am in US. And would also like to knw the importance of 15G and 15 H forms..
Would highly appreciate if u can post an articale related to this or if u can directly email the inputs on the same.
And i would like to gain more practical knowledge from u regarding investments.
Thanks,
Mehul
Hi,
I want to know know the difference between company FD and Bank FD…………
suggest me which one is better…
Hi Rajesh,
As mentioned in this article, company FDs offer a better rate compared to bank FDs, but are slightly riskier.
Which one is better for you depends on your risk profile and your other investments – there is no right or wrong here!
Thanks…..
Actually i am doing a project on “Factor analysis of comapny FD w.r.t. Bank FD”……
so i want to know in detail about company FD and their factor difference with bank FD….
I am impressed with your writing skills…..i want to know the types of risks associated with FD…..and also want to know what factors affects the choice of fixed deposits…
kindly reply
Hi Deepak,
Thanks – I am glad that you like it.
However, it would be nice of you to wait for at least a couple of days for an answer. In any case, the questions you have asked have already been covered in the article.
Thanks for not clearing my doubts…………..
I think that this site is different from others…bt………..
I wouls like to know the different company Fixed deposit rates.
So i can choose anyone from them….
please help me out
Hi Harsh,
The company FD rates keep changing. So, it is out of scope for this website!
However, you should be able to find the rates for open company FDs with a Google search…
Hi Dnyanesh,
This is covered in the article: - Company FDs are slightly riskier than bank FDs- Company FDs are not insured, whereas bank FDs are
- Company FDs provide better returns (rate of interest) To decide which is better for you, you have to keep these factors in mind. If you need personalized investment advise, you can avail of the “My Financial Plan” service – using it, you would be able to plan for all your important financial goals in life, and would be able to invest for it efficiently. You can find more details here.
Hi,
I was unable to understand the difference between FDs and CDs. Could you please explain.
Hi,
I also wanted to know which is the better option to invest. A fixed deposit or a CD. I am a student currently and I worked previously. I wont be using the money I earned for some time so thought of investing it. For me what would be the ideal investment option.
Hi Jayalakshmi,
Please check out the following articles and the comments below them: - Post Office Time Deposit Account (Fixed / Term Deposit) - Post Office Schemes: Downloadable FormsProcedure for transfer of FD from one post office in one city to another post office of other city? and what are the documents needed for the transfer?
Sir,
I had invested my retirement proceeds in Bank FDs for different maturity periods on cumulative basis. They are due for maturity in 2010-11. However, bank has deducted tax on them during 2009-10. I understand that this is on accrued income basis. However it is double whammy for me as I have to pay tax on income not actually received in hand. I also lose out the benefit of higher tax slabs for the current FY. If the accrued income is to be shown as income, I am also liable to pay the difference in tax as bank has deducted at 10% and I am in 30% bracket for the FY 2009-10. Please advise how I can take credit/account for the tax deducted by the Bank and also avoid the tax for the FY9-10 and take advantage of the higher slabs in 10-11?
hi there,
my f-i-l had fd inpost officer under his name with nominee as my husband for the fd’s , he had passsed away , since we live overseas could you pls advise of the procedure to get this transferred into his name.
Hello RVD,
Somewhere I found that a few readers are addressing you in short as RVD. I also felt its comfortable to follow
A very good article as usual
I have one question here. You had initially told that lock the amount for a higher period say 3 to 4 years as the ROI is directly proportional to the tenure. But at the end, you say that do NOT lock the complete money in FD as it gives a lower interest and look at FD only for a shorter term.
Aren’t they contradicting?
Thanks,
Raghavan alias Saravanan M
Bengaluru | India
http://shade.org.in