A fixed deposit is a type of investment in which a lump sum amount has deposited in a financial corporation on a laid down interest rate. Total interest benefit then will be calculated on the duration of a determined tenure. You can withdraw the amount before maturity but the amount withdrawn before the tenure completion will result in paying a penalty.
Today, FD is one of the trendy ways to invest money for a better return. Convenience in implementation and low risk are also the main factors for its popularity. For newcomers, it can be a good opportunity to test different aspects of investment. Time tenure for an FD can be 7 days and go as high as 10 years.
How does fixed deposit works?
You let a lump sum amount be in the banking or nonbanking financial companies for a specific period. Interest on the principal amount will be determined by the tenure you wish to hold it for.
The more time you let the money kept at the corporation the more interest you will get on your principal amount. The interest rate on fixed deposits varies from 3% to 8%. Although, senior citizens could get an extra interest rate of 0.50% more than the determined rate.
Benefits of fixed deposit
The following are the major benefits that make a fixed deposit a go-to investment instrument for most consumers.
- More returns:
Returns on FD are more compared to that of a savings account. The interest rate depends on the time specified by the tenure chosen.
- Flexible tenure:
The tenure of fixed deposits can vary from 7 days to 10 years. You also have the flexibility to hold multiple FDs on different tenures in the same financial company.
- Mode of interest payments:
Consumers can select various modes to receive their interest earned. It can be on a yearly, quarterly or monthly basis.
- Loan facility:
90% of the principal amount deposited can be avail for the loan in case of an emergency. And the consumer still earns the interest even after borrowing the loan.
- Joint contribution:
You can share the FD with your spouse, parents or children. Although, their willing shall also demand in case of withdrawal from FD before maturity.
- Low risk:
Consumers will get the assured returns on fixed deposits. No risk of the loss of principal makes FD the choice of investment even for the most experienced players.
- The high-interest rate for senior citizens:
This is the factor for which it is a popular investment instrument among the senior citizens. The rate of interest is basically higher for senior citizens as compared to other consumers.
Types of fixed deposits
Regular FD:
- Deposit money for a specific tenure
- Tenure period can last from 1 week to 10 years
- Pre-determined rate of interest applicable
- Interest rates higher than the saving account
Tax saving FD:
- Tax excludes from the principal amount
- Exemption of tax up to Rs.1,50,000 annually
- One time lump sum deposited for a tenure of 5 years
- Withdrawal before maturity is not available
Senior citizen FD:
- Individual must be above the age of 60 years
- Additional interest rates of up to 0.50% are applicable
Taxation
Tax deduction at source on FD depends on consumer’s standing in the income tax bracket. Usually, it varies from 0% to 30%. Tax will be deducted by the financial companies if the interest earned is more than Rs.10,000 annually. Banks issue Form 16A every quarter to the customer, as a receipt for Tax Deducted at Source.
Fixed deposit vs recurring deposit
Recurring deposit is a term deposit that offers monthly deposit until a specified tenure. The tenure ranges from 6 months to as high as 10 years.
One of the main differences between the fixed deposit and recurring deposit is the method of depositing the principal amount. You can invest a lump sum amount in fixed deposit whereas in recurring deposit a certain amount will invest on a monthly installment basis.
Top fixed deposit rates provided by the banks in India
Interest rates fluctuate according to market situations.
| Banks | Interest rate | Interest rate for senior citizen |
| State Bank of India | 4.50% to 6.25% | 5% to 6.75% |
| HDFC Bank | 3.50% to 6.40% | 4% to 6.90% |
| ICICI Bank | 4% to 6.60% | 4.50% to 7.10% |
| Axis Bank | 3.50% to 6.70% | 3.50% to 7.35% |
| Bank of Baroda | 4.50% to 6.30% | 5% to 6.80% |
| Punjab National Bank | 4.50% to 6.30% | 5% to 6.80% |
| Citibank | 3% to 5.25% | 3.50% to 6% |
*Mentioned interest rates are determined as of December, 2019. Rates are subject to change according to the banks decisions.
Final words
A fixed deposit offers higher rates which leads to achieving better returns. You will earn more interest than savings account even if you apply for a short-term deposit. Also, the returns will not face any impact on whether the market is fluctuating. So there is almost no risk in fixed deposit.
The higher interest rate facility for senior citizens makes it the choice of the old. The rates for senior citizens can be anywhere between 0.25% to 1% annually. Also, the different interest payout modes can be a boon for retired individuals. If you are looking for regular interest payouts, you can choose a non-cumulative FD by selecting monthly, quarterly, half-yearly or yearly payouts.
A fixed deposit greatly aids the financial needs of the individuals seeking it. The loan facility available in FD makes it more flexible to use it in case of an emergency. Also, the huge lump sum after maturity can be used in marriage, acquiring accommodation, medical treatment or even starting your own business.
