Fixed Deposits

What is a Fixed Deposit (FD)?

A fixed deposit (FD) is an investment instrument that public and private banks and NBFCs provide. You can invest a lump sum amount of money in FD in exchange for interest on maturity along with the principal amount. The period for which you invest in your maturity period and you cannot withdraw before maturity. To withdraw before maturity you need to pay a penalty and receive a lower interest rate. 

The rate of interest on a fixed deposit differs from one bank to another. Further, the rate of interest of an FD is higher than the interest rate of a savings bank account. The interest amount on FD is either paid at regular intervals to an investor or paid at FD maturity, as opted by an investor. On maturity, you will receive the principal amount as well as the compound interest on the investment. The interest on FD is either paid at regular intervals to an investor or paid at FD maturity, as opted by an investor. A separate bank account is not required to invest in a fixed deposit account

How does an FD Fixed Deposit Account work?

Once you invest in a fixed deposit your investment amount is locked in for that period of time. You surely earn interest on such principal amount and interest is credited to your FD account as per the payout term. You can choose a payout of monthly, quarterly, half-yearly, or yearly. Accordingly, the interest rate is applied to the investment amount and compounded monthly, quarterly, half-yearly, or yearly as the case may be. 

On maturity, you can either withdraw the matured amount or reinvest the matured amount again in the same or different type of FD. Alternatively, you can also set a maturity instruction of auto-reinvest with your bank or NBFC and the maturity amount will be reinvested automatically on maturity. You can easily change the maturity instruction before the maturity date. 

What are the Types of FD?

1. Normal Fixed Deposit

These are the traditional fixed deposits that are offered by public/ private banks and NBFCs. The interest rate is pre-determined and the lock-in period varies from 7 days to 10 years. The interest rate ranges from 4% to 7.50% and is usually higher than the savings bank account interest rate. You don’t need a bank account to open an FD with the specific bank. However, you need to comply with the KYC requirements. 

2. Tax-Saving Fixed Deposit

As the name suggests a tax-saving FD provides a tax benefit up to Rs 1.5 lakhs under section 80C of the Income Tax Act, 1961. However, you cannot withdraw before the lock-in period of 5 years. You must account for your emergency requirements before investing in a tax-saving FD for 5 years. 

3. Senior Citizen Fixed Deposit

The senior citizen fixed deposit is available only to individuals who are more than 60 years of age. The interest rate on a senior citizen FD is higher than the regular or traditional FD. It provides an additional interest rate ranging from 0.25% to 0.65% higher than the normal rate. Hence, it benefits the senior citizens and offers them a better investment option.

4. Flexible Fixed Deposit

A flexible fixed deposit or sweep-in FD is an investment option wherein you can invest any amount of money and for any tenure. You can also withdraw before maturity. It offers the benefits of a regular FD and a savings account. You need to invest a lump sum amount for a tenure that suits your criteria. The fixed deposit account is linked to your savings account and the money keeps shuffling between these accounts. The amount depends on the instructions set by you.

5. Cumulative Fixed Deposit

A cumulative fixed deposit is just like a regular or traditional FD but with a difference in interest payout. In the case of a cumulative FD, the interest earned on the FD during the tenure is credited to the FD account at the end of each compounding period. However, this credited interest is not available for withdrawal and will be credited at maturity along with the principal amount. It is a better option for investors who are well aware of their near-future requirements of funds and do not need a regular payout of interest. 

6. Non-Cumulative Fixed Deposit

Non-cumulative fixed deposit unlike cumulative FD allows a regular payout on interest. Here, the interest is paid to the investor at the chosen frequency of the interest payout. You need to choose the frequency at the time of application of the FD. The frequency can be monthly, quarterly, half-yearly, or annually. Since you withdraw the interest amount the maturity amount will decrease even more if the FD involves a higher payout frequency. These FDs are well-suited for investors who need a regular inflow of money and have a lump sum amount to invest.

7. Company or Corporate Fixed Deposit 

The Non-Banking Financial Institutions (NBFC) offer Corporate Fixed Deposits or Company Fixed Deposits. It acts as a savings product for the investors. The company or corporate FD provides an interest rate that is usually higher than the regular fixed deposits. However, you must always check the creditworthiness of the NBFC offering the FD before investing. You can refer to the credit score provided by credit agencies like CRISIL, ICRA & CARE.

Fixed Deposits for an NRI Non-Resident Indian

NRE Fixed Deposit

Often the NRIs have a doubt about fixed deposits and are they eligible or not. Well, a non-resident Indian just like a resident can invest in a fixed deposit but with a few differences. The NRE fixed deposit is very similar to a regular FD, you can invest in an FD with your NRE account instead of a savings account. You can open an FD online through your net banking account seamlessly. However, only a Non-Resident Indian (NRE) or a Person of Indian Origin (POI) holding an NRE account can open an NRE FD. You need your passport, work visa, and address proof to open an NRE FD. 

NRO Fixed Deposit

Similar to an NRE FD account, the NRO FD account also requires an investor to hold an NRO account to open an FD. You can invest in FD by logging into your NRO account and providing the documents. The interest earned is taxable in India and the tax can be reduced considering the applicability of the Double Taxation Avoidance Agreement (DTAA). The interest of FD is completely repatriated. However, there are a few restrictions and set limits for the repatriation of the principal amount.

Features of a Fixed Deposit

1. The amount can be deposited only once in an FD account. For any additional investment, you will have to open a new FD scheme or account.
2. The tenure ranges from 7 days to 10 years. You can select the maturity in days, months, or years.
3. The minimum amount of investment varies from one bank and NBFC to another. Usually, the amount varies from Rs 1,000 to Rs 5,000 across different types of FDs. However, there is no limit on the maximum amount of investment. 
4. The rate of interest is usually higher than the interest rate on savings accounts. 
5. The interest rate is fixed and does not change after the investment. The market fluctuations do not affect the fixed interest rate on any type of FD.
6. You can either invest in a fixed payout or payout at maturity of the interest earned. You can select the payout of monthly, quarterly, half-yearly, or yearly and the interest will be credited to your savings account. 
7. Since a fixed deposit is intended to have a lockin period any premature withdrawal attracts a penalty and loss of interest. The penalty differs from one bank/ NBFC to another.
8. You can avail of a loan against a fixed deposit in the case of an emergency. The rate of interest on such a loan will be lower than other loans. This is because a loan against FD is a secured loan with the FD being collateral. 
9. Nowadays you can also apply for a credit card against an FD. Moreover, banks provide the facility of a safe locker with an FD being the primary requirement. 
10. You can add a nominee to your FD to ensure in the case of death the maturity proceeds are given to your nominee. 

What are the benefits of Investing in a Fixed Deposit?

Assured Rate of Interest

One of the major advantages of investing in a fixed deposit is the assured rate of interest. Once you invest in an FD you will surely earn the rate of interest agreed between you and your bank. Moreover, the banks and NBFCs provide the interest rate on FDs on their official website. You can easily know the interest rate and accordingly invest with the bank/ NBFC providing the higher rate of interest.

Liquidity

No doubt the fixed deposit comes with a lock-in period but you can withdraw anytime and anywhere. Premature withdrawal is very easy and simple. You just need to log in to your bank account through internet banking or mobile banking and request a withdrawal.

Loan against a Fixed Deposit

You can avail of a loan against your fixed deposit in case of a financial need for funds. Since a loan against an FD is a secured loan with the FD being collateral the interest rate will be lower than an unsecured loan. The process is very simple and seamless. You can avail of a loan for an amount ranging from 90% to 95% of the fixed deposit amount. This range varies from one Bank/ NBFC to another. 

Flexibility of Tenure

You can invest in a fixed deposit for a tenure that suits your financial needs or purpose. You can invest for a tenure ranging from 7 days to 10 years in days, months, and years. For example, if you have a lumpsum amount and you want to invest in FD for a foreign trip you are willing to take in say another 4 months. You can invest for just 4 months and then liquidate your fixed deposit. 

Income Tax on an FD Fixed Deposit

1. The interest income is chargeable to tax under the head ‘Income from Other Sources’. The rate of tax is the slab rate applicable to the investor on the basis of the total taxable income. 
2. Interest income up to Rs 50,000 is exempted from tax under section 80TTB for a senior citizen. A senior citizen can file Form 15H to ensure no TDS is deducted. 
3. If the total interest collectively from all FDs with a bank taken together exceeds Rs 40,000 in a financial year then the TDS will be deducted at a rate of 10%. If your total taxable income in a financial year is less than the basic exemption limit then you can submit Form 15G. You will have to provide a copy of Form 15G to the banks and the bank will not deduct TDS.
4. The principal amount of a tax-saving fixed deposit provides a tax deduction. You can claim up to Rs 1.5 lakhs under section 80C of the Income Tax Act, 1961.

Disadvantages of Investing in FD

1. A premature withdrawal of an FD attracts a penalty and loss in the interest income. The penalty is in the form of a reduced effective rate of interest. The percentage of penalty differs from one bank/ NBFC to another.
2. Firstly the interest rate on a fixed deposit does not account for inflation and secondly, the interest rate has been decreasing for the past few years. This makes the FD investment less attractive in comparison to its alternatives.
3. Only tax-saving fixed deposits provide a tax benefit under section 80C. Other types of fixed deposits do not attract any tax deduction and moreover, the interest earned is taxable under the head ‘Income From Other Sources’. 

Eligibility for Investing in FD

The following types of entities are eligible to open a fixed deposit:

• Indian resident/Non-Resident India NRI, Person of Indian Origin POI
• Minor India Resident (Under the guardian’s holding)
• Senior citizens (Citizens whose age is more than 60 years of age)
• Companies (Domestic and Foreign)
• Partnership firms including a limited liability partnership
• Association of Persons AOP, Body of Individuals BOI, Hindu Undivided Family HUF
• Individuals or joint investors
• Societies or clubs
• Sole proprietorship

Documents Required for Investing in an FD

For An Individual Investor 

1. Proof of Identity- Aadhaar, PAN, Passport, Voter ID, Driver’s License, Ration Card
2. Proof of Address- Voter ID, Aadhaar, Passport, Driver’s License, Ration Card, Utility Bills, Bank Statement.

For A Partnership Firm including LLP

1. Partnership Deed along with PAN of the firm
2. Name and Address of all the partners along with specimen signatures
3. Declaration of all partners agreeing for investment in FD

For a Trust or an Association

1. Trust/ Association Deed along with PAN of the Trust/ Association
2. Name, Address, and PAN of the authorized signatory along with specimen signatures
3. A copy of the resolution for investment along with address proof of the Trust/ Association
4. Trust/ Association Registration Certificate

For a Company

1. Copy of Memorandum & Articles of Association/Bye-laws
2. Name, Address, and PAN of the authorized signatory along with specimen signatures
3. A copy of the resolution for investment along with address proof of the Company

How to Open an FD account?

You can open a fixed deposit account either online or offline. 

Online Mode– You can easily open an FD account by logging in to your internet banking account or mobile banking account. You only need to add a request to open an FD, add the details of amount, type of FD, and maturity instructions. You will be asked to authenticate the transaction through an OTP. 

Alternatively, you can also invest through various apps. Here, you need to add the bank account details along with the details of amount, type of FD, and maturity instructions. 

Offline Mode– You will have to visit the nearest branch of your bank or NBFC to open the account. Further, you must file an application form and submit it along with documents to the appropriate representative of the bank. You will receive an FD receipt on the opening of the fixed deposit account. 

What is an FD Calculator?

Scripbox’s FD calculator helps you to estimate the maturity amount and the interest you can earn. It also allows you to estimate the interest-earning using 2 investment approaches. Firstly you can estimate the maturity value by entering the principal amount you want to invest. Secondly, you can use the target amount approach. This way you can estimate how much you must invest today to earn the maturity amount. You simply need to provide the investment amount, duration, interest rate, and payout frequency. 

By using a fixed deposit you can estimate your maturity amount and decide whether the FD investment will serve your investment objective or not. You can also use this FD calculator to compare the wealth gained with other investment options in a similar category. Scripbox provides a calculator for different investment options. You can use Scripbox’s fixed deposit interest calculator along with a debt mutual fund calculator and PPF calculator. And once you know the wealth expected to be gained at the maturity under each option, you can take the best-suited investment option.

How to Close an FD account?

You can close your FD account either after maturity or before maturity. Once the FD gets matured the amount is credited to your savings account and the FD scheme is closed. If you want to close your FD account before maturity then it will be a premature withdrawal and attract a penalty. Simply log in to your net banking or mobile account and go to fixed deposits. Now add a request to with from your fixed deposit scheme. The penalty will be deducted and the rest of the value will be credited to your savings account.

Frequently Asked Questions