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What is a Fixed Deposit?

A fixed deposit or FD is an investment instrument that banks and non-banking financial companies (NBFC) offer their customers. Through an FD, people invest a certain sum of money for a fixed period at a predetermined rate of interest in an FD. The rate of interest varies from one financial institution to another, although it is usually higher than the interest offered on savings accounts.

Fixed deposits are available for different periods, ranging from very short-term tenures of 7-14 days to long tenures of 10 years. A fixed deposit is sometimes known as a term deposit.

How does a Fixed Deposit work?

You may think of a fixed deposit as lending money to a bank or an NBFC. When you invest in an FD, the financial institution guarantees to return the invested sum at the end of the tenure, known as the maturity period, and pays you interest for it. The bank may use this money to lend to other borrowers and charges them an interest for the same. A portion of this interest is passed on to you.

The interest offered depends on the tenure or maturity period of the FD. A 7-day fixed deposit will carry a lower annual interest rate compared to a one-year FD. This is to compensate for the time-risk of money. Simply put, a rupee today is more valuable than the same rupee a year from now. This is because inflation pushes up prices over time. A rupee will buy you more goods today than it will a year from now. An investor needs to be compensated for this.

You can choose to reinvest the interest or receive an interest amount periodically in your bank account.

Cumulative FDs pay you the interest and the principal at maturity. The interest is reinvested every year. This means that you will not be eligible to receive regular interest payouts, instead of receiving a lump sum at the end of the FD tenure. The cumulative FD option may be suitable for you if you do not need a regular stream of income. Under this option, you will also benefit from the power of compounding, as the following year’s interest will be calculated on the principal plus interest of the previous year.

Non-cumulative FDs will pay you interest at fixed intervals. You could choose to receive interest payments monthly, quarterly, half-yearly, or annually, depending upon your needs. This will give you a regular stream of income. However, the downside of non-cumulative FDs is that you will lose out on earning interest on interest.

How is interest on FDs calculated?

Calculating the interest earned on fixed deposits is a function of the amount invested, the rate of interest being offered, and the duration of the investment. The basic formula to calculate interest on your FD is:

Interest on FD = Amount Invested x Interest Rate x (Duration/ 12 months)

Use ET Money fd calculator to save your time and calculate the maturity amount you will receive before and after-tax deduction according to the tax slabs.

However, depending upon whether you choose a cumulative or non-cumulative FD, the interest amount will vary. For instance, if you choose to invest ₹25,000 for 3 years at an interest rate of 7.1% per annum, a cumulative FD would have a maturity value of ₹30,712.

Year Principal Amount Interest Earned at 7.1% p.a. Amount at the End of Year
1 ₹25,000 ₹1,775 ₹26,775
2 ₹26,775 ₹1,901 ₹28,676
3 ₹28,676 ₹2,036 ₹30,712

However, in the case of non-cumulative FDs, the interest will be paid out periodically and lose the compounding power. Additionally, the rate of interest offered on non-cumulative FDs is also lower than on cumulative FDs.

Who should invest in an FD?

When you invest in a fixed deposit, the duration of investment or tenure and interest amount is predetermined. The institution also assures you to return your money at maturity. That makes FDs a relatively safe investment avenue. Fixed deposits are a good investment option for:

People with a low-risk appetite who want to invest but still cannot stomach high risk. FDs provide a higher return than money kept in the savings account.

For meeting short-term goals because returns are assured, and volatility is low.

Balancing the risk in an overall portfolio. Even for those with a medium-to-high risk appetite, investing a portion of your overall funds in fixed deposits balances out the risk from market-linked instruments like equity or mutual funds.

Retired individuals who want to ensure stability of investment.

Types of Fixed Deposits

Before you invest in a fixed deposit, you must know the different FDs offered in the market.

  • 1.

    Standard Term Deposits

    Standard fixed deposits are investment schemes wherein you invest an amount for a fixed period and a predetermined interest rate. The period of investment or tenure can range from 7 days up to 10 years. The interest offered depends on the duration of investment as well as the financial institution offering this instrument.

  • 2.

    Senior Citizen Fixed Deposits

    For individuals over 60 years of age, banks and NBFCs offer a higher interest rate on FDs than other investors, usually providing about 25-50 basis points (0.25-0.50%) more. They also provide an additional tax benefit. Interest from senior citizen FDs does not carry a tax deducted at source if it does not exceed ₹50,000 a year. Other investment options do not provide this benefit for seniors.

    For individuals who are not senior citizens, the TDS deduction limit is at ₹40,000 a year. Investing in FDs as a senior citizen will reduce your overall tax burden and hence, increase returns.

  • 3.

    Tax-Saving Fixed Deposit

    There are specific tax-saving FDs that are eligible for tax deductions. A tax-saving FD has a maturity period of 5 years and the principal amount, up to ₹1,50,000 per annum is tax-deductible under section 80C of the Indian Income Tax Act.

  • 4.

    Recurring Deposit

    A recurring deposit is a type of fixed deposit wherein you can invest a fixed sum monthly or quarterly for a specified time. The interest rate is predetermined. At the end of the maturity period, you will receive your principal along with interest calculated proportionately. For instance, you can deposit ₹1,000 every month for five years. Interest on the first deposit will be paid for five years while that on the last deposit will be paid for one month.

  • 5.

    Flexi Fixed Deposit

    A flexible fixed deposit is linked to your savings account. In this instrument, you can instruct your bank to automatically transfer any sum beyond a predetermined balance to a fixed deposit via an auto sweep-in feature. For instance, if you want to maintain a balance of ₹20,000 every month, any excess will be transferred to an FD. Conversely, if your balance falls below ₹20,000, the bank will liquidate a portion of your FD to maintain your balance. It gives you the benefit of liquidity and investment.

    The interest on the Flexi-deposits is higher than savings account interest rates but lower than standard fixed deposit rates.

  • 6.

    Fixed Deposit for Non-Resident Indians

    Non-resident Indian citizens can invest in non-resident external (NRE) or non-resident ordinary (NRO) fixed deposits. NRE FDs are suitable for citizens earning in a foreign currency. Although there are currency fluctuations, the most significant advantage of NRE FDs is that the whole amount, principal and interest, are tax-free. NRO FDs can be deposited in Indian or foreign currency and are taxable at 30% per annum.

  • 7.

    Corporate Fixed Deposits

    Some companies or corporate entities also offer fixed deposits. While they offer a higher rate of interest than banks and NBFCs, the risk associated with corporate FDs is higher. While bank and NBFC deposits enjoy backing and insurance coverage from the DICGC, corporate fixed deposits do not provide this insurance. If a company goes bankrupt, there is no guarantee that your money in corporate deposits can be recovered.

Benefits of FDs

Fixed deposits have many benefits.

  • Assured Return

    Assured Return

    Unlike market-linked securities that may result in losses due to market volatility, fixed deposits provide an assured rate of return on investments. Your capital remains safe in FDs, and returns are higher than savings accounts.

  • Benefits of Compounding

    Benefits of Compounding

    With FD investments, you can earn interest on interest, thereby enjoying higher returns and faster multiplication of money

  • Low Minimum Investment

    Low Minimum Investment

    If you want to inculcate an investment habit but do not have a large sum to do so, FDs are a good option because investment amounts can start as low as Rs. 500.

  • Liquidity

    Liquidity

    Premature withdrawal of FDs is permitted, although you will lose some interest in the missed duration. However, this gives you the benefit of liquidity since you can liquidate the FD in times of emergencies.

  • Easy Process

    Easy Process

    FDs are the easiest instruments to invest in, both offline and online, through net banking or mobile banking.

  • Higher Rates for Senior Citizens

    Higher Rates for Senior Citizens

    Senior citizens can earn more from their life's savings and move one step closer to no-compromise retired life.

What Role Can FDs Play In Your Portfolio?

  • Balance in your portfolio

    Fixed deposits can provide balance in your portfolio. While market-linked instruments such as equities and mutual funds carry an element of risk, FDs do not. They are safe investments that provide an assured return over a fixed period of time.

  • Net value of your portfolio remains positive

    During market lows, the returns from FDs can ensure that the net value of your portfolio remains positive as the interest earned from FDs can compensate for any losses that your market-linked investments may have incurred.

  • Suitable for short-term goals

    While equities can fulfill long-term financial goals, FDs are more suitable for short-term goals. They are also a wise investment choice for financial goals where you cannot afford to lose the capital investment.

Best Fixed Deposit Rates Offered

The interest rate on FDs is usually higher in private sector banks and NBFCs when compared
to public sector banks. Here is a list of the top FD interest payers at present:

Name Bank/ NBFC Regular FD Rate Senior Citizen FD rate
Bajaj Finserv NBFC 5.98-7.00% 6.22-7.25%
Mahindra Finance NBFC 5.70-6.45% 5.95-6.7%
State Bank of India Public Sector Bank 2.90-5.40% 3.40-6.20%
Punjab National Bank Public Sector Bank 3.00-5.30% 3.50-5.80%
ICICI Bank Private Bank 2.50-5.35% 3.00-5.85%
HDFC Bank Private Bank 2.50-5.50% 3.00-6.25%

How to Invest in a Fixed Deposit

You can open an FD account both online and offline with your preferred financial institution. Visit the local branch of the bank or
NBFC you wish to open an FD with. Fill in the required forms and submit KYC documents. The account will be active in a few days.

Online FDs are easier to open. With ET Money, you can open an FD in 3 simple steps:

  • 1

    Fill FD details

    Fill in your FD details, including amount, tenure, & interest payout method

  • 2

    Setup investment account

    Set up your investment account by answering a few questions

  • 3

    Payment

    Make the payment on your Fixed Deposit

Taxation on FDs

The interest earned on fixed deposits is taxable.
It is charged at your applicable tax slab under the head of "Income from Other Sources".

However, banks will deduct TDS (tax deducted at source) at the rate of 10% per annum from your interest. That can be accounted for when filing your income tax. When filing your taxes, calculate the interest income you have earned for the year, compute tax by charging tax based on your income tax slab rate and then deduct any TDS amount. This is the net tax payable. TDS on interest income is deductible only if your total interest is above ₹40,000 per annum. For senior citizens, the limit is ₹50,000.

Frequently asked questions

What are the minimum and maximum deposit amounts for FDs?

The minimum amount of investment in an FD varies from bank to bank. Some plans allow you to start investing with as little as ₹100. There is no upper limit, though you can check with your bank for further clarification.

What is the minimum age for opening an FD?

An FD can be opened for a child as young as one year. However, for minors, a parent or guardian has to open one on their behalf. Any individual over the age of 18 can open their FD account.

How often will I receive interest?

Interest payments depend on the FD plan. You can choose to have monthly, quarterly or annual receipts of interest. If you select the reinvestment option, you will receive it in full along with the principal at maturity.

What happens if I want to liquidate my FD before maturity?

Most banks give you the option to withdraw your FD before maturity in cases of emergencies. Early withdrawal will carry a small penalty charge and forfeiture of interest for the remaining duration. Premature withdrawal of tax-saving FDs are not permitted.

Can I get a loan against my fixed deposit?

Yes, you can avail of a loan against your FD for up to 90% of the maturity amount. Tax-saving FDs, however, are not eligible.

Who is eligible to open a fixed deposit?

  • Individuals who are citizens of India
  • Minors, with parental or guardian consent
  • Non-resident Indians
  • Sole proprietorships, partnership firms, public or private companies
  • Hindu undivided family
  • Statutory board or local authorities
  • Registered societies such as foundations, clubs, and associations

How to avail exemption from TDS?

Individuals whose interest earnings are less than ₹40,000 per annum (₹50,000 for senior citizens) can avail TDS exemption. Investors can submit Form 15G, while senior citizens will have to submit Form 15H.

What is an FD nomination?

As an FD investor, you will be asked to name a nominee for your FD. In case of your demise before maturity, the amount will be handed over to your nominee. It is not necessary to have a nominee, but it is recommended.