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Fixed Deposit

Fixed deposit refers to an investment scheme that banks and non-banking financing companies provide. FDs offer greater returns on the principal invested when compared to the returns generated from a regular savings account.

Fixed deposits have a fixed tenure, hence the name. Depending on a consumer’s investment portfolio, FD investment period can either be short-term or long-term. The interest rates on fixed deposits vary from one company or bank to another.

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Fixed deposit investors need to remember, however, that they cannot withdraw money before maturity without financial repercussions. In emergencies, early withdrawal is possible after payment of penalties.

Who Offers FD?

As stated previously, fixed deposit investments are offered by banks, post-offices and other non-banking financial companies. In India, investors have countless options to open fixed deposit accounts. However, they must compare the interest rates, the reputation of the company and other factors before depositing their funds.

You can approach any of the banks or NBFCs in the country to open a fixed deposit account. Individuals lacking bank accounts can also avail fixed deposit investments through post office accounts.

Types of FDs Available

There are several fixed deposit types that investors need to know about before investing. Without such knowledge, you may end up picking up plans not suitable to your investment objectives. Listed below are some of the common options open to prospective investors.

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  • Corporate fixed deposits

These are fixed deposit schemes that are held by companies, other than banks. Also known as company FDs, investing in such instruments, may, in some cases, lead to higher returns.

  • Standard fixed deposits

Standard plans are basic investment schemes where you invest a fixed amount with a financial institution. After the fixed maturity period expires, you are eligible to receive the principal amount, along with the interest earnings from the scheme.

  • Senior citizen fixed deposit

Individuals aged over 60 years are also eligible to invest in fixed deposit instruments. However, most plans geared to this age group offer flexible tenure options. Additionally, senior citizen investors are eligible for higher interest rates on their investments compared to the standard schemes.

  • Tax-saving fixed deposit

If the primary goal of an investment is to save taxes, investors can take advantage of tax-saving FDs. However, the maximum deposit for such plans is limited to Rs. 1.5 Lakh per year. The lock-in period for this type of FD is 5 years.

  • Cumulative fixed deposit

In these fixed deposit schemes, the interest is compounded quarterly, half-yearly or yearly. However, the total interest earnings are paid at the time of maturity. Opting for this kind of FD allows you to build your corpus considerably.

  • Non-cumulative fixed deposit

Interest earnings on fixed deposits are paid out monthly, quarterly or half-yearly. This option is best for investors looking for a regular source of income. Hence, pensioners benefit prominently from such plans.

  • Flexi fixed deposit plans

In this case, the deposit moves between a savings account and an FD account. Therefore, to initiate an investment using flexi FDs, investors need to connect the fixed deposit account with their savings account. Investors can enjoy high interest rates on their deposits along with liquidity with this category of FD plans.

  • NRO fixed deposit account

Non-resident Indians can deposit their earnings generated from India in an NRO FD account. The interest earned from these FD accounts can be repatriated entirely by NRO account holders, and the principal amount can only be repatriated up to a certain limit.

  • NRE fixed deposit account

NRIs can remit their income generated abroad and invest in an NRE fixed deposit account. Both the interest and principal are repatriable in this case.

What are the Prevailing FD Rates?

There is no fixed rate on FD investments. The rate of return for an investor greatly depends on the bank or NBFC offering the investment option. Each bank provides different interest rates on deposits.

Moreover, the return rate also depends on the age of the investor. Senior citizen investors can expect higher returns when compared to individuals below 60 years.

While the interest rates vary based on several variables such as FD tenure, the financial institution offering it and the type of FD account or plan, investors can always expect better returns from their FDs than they can from their savings accounts.

Eligibility Criteria for fixed Deposit Investment

The following list of individuals is eligible to open a fixed deposit account in India –

  • Indian resident
  • NRI
  • Individuals or joint investors (2 or more individuals)
  • Senior citizens
  • Minors
  • Sole proprietorship
  • Societies or clubs
  • Companies
  • Partnership firms

Documents Necessary for Fixed Deposit Investment

Investors need to submit certain papers regarding their identity and residential address to invest in FD schemes successfully.

  • Identity Proof (Any One)
  • Passport
  • Voter ID card
  • PAN card
  • Aadhaar card
  • Driving license
  • Address Proof (Any One)
  • Electricity bill
  • Telephone bill
  • Post Office issued ID

Senior citizen and minor investors need to submit age proof documents as well, which includes matriculation certificate, birth certificate, etc.

What is the Lock-in Period?

Lock-in period for a fixed deposit is also referred to as the maturity period. During this time, investors cannot withdraw their deposit without financial repercussions. For tax-saving FDs, withdrawing the sum before the lock-in period ends is strictly prohibited.

For other kinds of FDs, premature withdrawal is possible but leads to penalties. The exact penalty terms may differ from one investment plan to another.

It is always desirable, however, to keep deposits intact until maturity. When the term ends, investors receive substantial returns. Withdrawing early will lead to loss of interest earnings from the FD.

Why Should Investors Consider FD for Their Portfolio

Investors may be exposed to risks when they invest in market-linked instruments to earn higher returns. Hence, to ensure balanced financial growth, investors need to seek safer investment options as well.

Fixed deposits are safe and lead to guaranteed returns, as opposed to riskier instruments. Therefore, even when an investor loses money on other investment instruments, they can recover a portion of their losses from the FD investments.

Advantages of FD

FD investors can look forward to the following benefits from their investments.

  • Assured returns – Unlike most other investment schemes, FDs offer guaranteed returns on the deposited sum.
  • Offers great flexibility – The best FD plans offer flexibility when it comes to the tenure of the plan. Depending on investor goals, they can either open short-term FD accounts or long-term FD accounts. For reference, most financial institutions offer maturity tenures ranging from 7 days to 10 years.
  • High capital appreciation – Cumulative fixed deposit plans compound interest monthly or quarterly or half-yearly. Hence, the deposit amount is substantially appreciated by the end of tenure.
  • Additional source of income – The investor can select the frequency of interest payout for non-cumulative fixed deposit plans. Therefore, they can act as an added source of income.

Limitations of FD

While bank fixed deposits are greatly beneficial for many, they suffer from certain disadvantages as well. Here are some limitations for such instruments.

  • Interest rates remain fixed – Fixed deposit interest rates do not grow over time or comply with inflation. Therefore, they are not the appropriate choice for investment if an individual is trying to beat inflation.
  • Deposit lock-in – A lump sum amount is locked-in for a specific period. You cannot use this money in case of emergencies if you want to ensure proper returns from the investment. Early withdrawals lead to penalties and additional charges.
  • Early withdrawal charges – If an investor decides to initiate a premature withdrawal from an FD, they will end up forfeiting a portion of their interest earnings from the scheme.
  • Limited or no tax benefits – Unless an individual specifically opts for tax-saving FDs, investors are not eligible for any tax exemptions or rebates on the fixed deposit interest earnings.

What is Loan against FD?

Fixed deposit investors can avail of a loan against their fixed deposit investment. The maximum loan in such a case can vary between one bank FD and another. The loan quantum, in this case, is up to a certain percentage of the fixed deposit amount.

The interest rate on such loans is generally lower when compared to unsecured credits. An investor availing such loans must mandatorily check interest rates on loan.

The repayment tenure for the loan is limited to the maturity period of the fixed deposit in question.

Who Should Invest in Fixed Deposit?

Fixed deposits are perfect investment instruments for inexperienced investors. Further, risk-averse individuals can benefit greatly from such schemes. Since FDs offer assured returns, there is almost no risk of principal loss.

However, investors should remember that the rate of return from such an investment is limited when compared to other high-risk options.

Taxation on FD Earnings

Fixed deposit interest earnings in a year undergo TDS, or Tax Deducted at Source, as per the provisions mentioned in the Income Tax Act. Consequently, interest earnings are added during Income Tax Returns under the head “Income from Other Sources”.

The IT Department would thereby adjust the TDS against your total tax liability. However, interest income is only deducted when interest earnings from all sources exceed Rs. 40,000. If the amount is lower than Rs. 40,000, you need to submit Form 15G/H to declare it to such financial institutions. You can opt to submit the Form 15G/H even if your interest earnings are higher than Rs. 40,000. However, in that case, you need to clear all tax liabilities from your end.

If an individual opts for a tax-saving FD, on the other hand, they can claim tax exemption of up to Rs. 1.5 Lakh in a financial year on the principal amount.

FAQs

  • What is the minimum tenure for FD investments?

Various banks and NBFCs offer different types of tenures. In most cases, the minimum tenure for a fixed deposit investment is 7 days.

  • What is the maximum loan amount available against FDs?

You can avail a loan between 70% and 90% of the accumulated fixed deposit amount. This range varies between the various financial institutions providing the FD facility.

  • What is the penalty charge for premature withdrawal of my FD?

The penalty may vary from one bank to another. However, in most instances, you would lose 1% of your agreed-upon interest rate for the FD when making an early withdrawal.

  • Who is eligible for TDS benefits on FDs?

If your total interest earnings for any financial year is below Rs. 40,000, you are eligible for TDS reprieve. For senior citizens, interest earnings up to Rs. 50,000 are TDS free.

  • How to avail TDS exemption from FDs?

To avail TDS exemption, non-senior citizen investors need to submit Form 15G. Senior citizen investors, on the other hand, need to submit Form 15H.

  • What is the minimum age requirement for investing in FDs?

Children aged between 1 and 15 years can have FD investments in their name. However, a guardian or parent must co-sign the investment papers for minor investors.

  • What is the minimum deposit amount allowed for FDs?

The minimum deposit amount can vary, based on the bank or NBFC in question. However, you can find plans that allow you to start investments at just Rs. 100.

  • What is the mandatory lock-in period for tax-saving FDs?

If you are investing in tax-saving FDs, keep in mind that the lock-in tenure for such an instrument is 5 years.

  • What is the maximum principal for tax-saving FDs?

In case of tax-saving fixed deposit plans, you can only deposit sums up to Rs. 1.5 Lakh.