Fixed Deposit
A FD is a type of financial instrument offered by banks and it allows individuals to deposit sums of money for fixed periods of time, like 1 month, 6 months, 1 year, 5 years etc. In general, fixed deposit accounts offer higher interest rates than savings accounts. Fixed deposits are regarded as safe investments and help people to grow their financial assets without exposing them to volatility and other risks associated with the financial market. Most of the banks offer fixed deposit accounts in India and the interest rates offered with these accounts depend on the tenure of deposit and other factors. The tenure offered with fixed deposits can range from 7 days to 10 years, whereas the interest rate offered can be as high as 9% per annum. Some of the banks even offer tax saving fixed deposits that offer tax benefits to customers.
5 Features of Fixed Deposit Account
- The main purpose of fixed deposit account is to enable the individuals to earn a higher rate of interest on their surplus funds (extra money).
- The amount can be deposited only once. For further such deposits, separate accounts need to be opened.
- The depositor is given a fixed deposit receipt, which depositor has to produce at the time of maturity. The deposit can be renewed for a further period.
- As per the Traditional scheme, the interest on the FD account is credited to the Savings account specified by the depositor on a monthly basis or on a quarterly basis. For the Reinvestment scheme, the interest is compounded to the principal amount on a quarterly basis.
- Tax is deducted at source, from the interest on Fixed Deposits, as applicable, as per the Income Tax Act, 1961.
Types of Fixed Deposits
There are various types of fixed deposit accounts that are available in India and investors can choose from the wide range of investment options based on personal and financial needs.
Normal/Standard Fixed Deposits
This is one of the most common fixed deposit accounts. It is also one of the most basic and uncomplicated forms of investment. A fixed sum of money is deposited for a certain pre-determined period of time and a certain interest rate is provided on the same.
Features
- Fixed tenure
- Standard interest rates
- Easy investment
- Secure
Special Fixed Deposits
These types of fixed deposits come with certain special benefits or perks when compared to the ordinary fixed investment plan. They usually offer higher rates of interest. One can also generally take a loan on these types of fixed deposits.
Features
- Higher rate of interest
- Special offers
- Additional benefits
Tax Saver Fixed Deposits
These type of fixed deposit accounts are usually for a longer tenure that ranges between 3 to 5 years, or more. Therefore, they come with a lock-in period and one cannot break these deposits or withdraw them prematurely, unless in the event of death of the account holder. The main advantage of these deposits is that one can claim tax exemption under Section 80C of the Income Tax Act.
Features
- Cannot be broken until completion of tenure
- The interest gained on these deposits are taxable
Cumulative Fixed Deposits
When it comes to cumulative fixed deposits, the interest earned on this will not be available or paid to the policyholder at regular intervals. Instead, interest will be paid only upon completion of the fixed deposit tenure along with the principal amount.
Features
- Interest paid with principal at the time of maturity
- Not ideal for those without a regular income like pensioners etc.
- Interest is compounded on a weekly, bi-weekly, monthly, quarterly, half-yearly or yearly basis
- This leads to higher gains, making it a more profitable form of investment
Non-Cumulative Fixed Deposits
In the case of non-cumulative fixed deposit, the bank pays the account holder the interest earned on the principal amount at regular frequencies.
Features
- Good option for pensioners
- Extra income
- Account holder can choose at what interval dividend should be paid
- Usually one tends to earn lesser on the whole in this scheme when compared to cumulative fixed deposit scheme
Flexi Fixed Deposits
A flexi fixed deposit is a type of fixed deposit account where the savings account is linked to the term deposit.
Features
- Provides flexibility
- Convenient
- Best of both worlds
What Are the Benefits of Fixed Deposit ?
- Assured returns: One of the main advantages of having a fixed deposit (FD) account is that it provides guaranteed returns on the investment. Hence, there is no risk involved in FDs when compared to other types of investments like mutual funds, debt funds, etc. Therefore, a fixed rate of interest will be paid on the investment amount.
- Very easy to open an FD account: It is a very easy to open an FD account and this can be done online in a matter of minutes. One can open FD accounts online in most of the major banks across the country with minimum documentation.
- Encourages Saving: Opening an FD encourages the habit of putting aside money for the rainy days of life. This inculcates the discipline of saving money for the long term.
- Higher rate of interest: FD accounts offer a higher interest rate when compared to savings accounts or other types of term deposit accounts like recurring deposits, etc. There are many banks, non-banking financial companies and other financial institutions that offer an attractive rate of interest.
- Flexibility: FD gives the account holder the flexibility to choose the amount of money he/she wants to invest and also decide on the tenure range. One can make investments for a minimum period of 7 days and maximum period of 10 years. There are some banks that also offer FDs for more than 10 years.
- Multiple accounts: One can hold multiple FD accounts at the same time without any hassle. For example, an individual can hold 2 or 3 FD accounts in the same banks. One can also hold FD accounts across different banks.
- Tax benefit: There are tax saver FDs that offer tax benefit under Section 80C of the Income Tax Act. One can invest up to Rs.1,50,000 and claim tax exemption for the same. However, most tax saver FDs have a lock-in period of 5 years.
- Helps beat risk: Opening an FD account is the best financial instrument to beat risks that arise from investing in other high-risk financial instruments such as stocks, mutual funds, etc. This helps manage financial risk on a long-term basis.
- Avail loan on FD: One can avail a loan in times of financial crisis on the FD amount. An individual can take up to 90% of the FD account amount as a loan. Please note that the account holder will still earn interest on the remaining amount left in the account.
- Minimal to no risk investment: FDs are minimal to no risk investments. One need not spend sleepless nights or worry about losing money in this type of investment.
- Highly liquid investments: FDs offer the customer the advantage of liquidity. In case there is a cash crunch or any other type of financial emergency, one can always close the FD or make an overdraft withdrawal from the same.
- Interest can be paid quarterly: One can supplement one’s income and earn a fixed sum on interest on a monthly, quarterly or half-yearly basis. For instance, in cumulative FDs, the interest amount is credited to the account of the FD holder on a regular basis. This comes in handy for those who do not have a regular source of income like pensioners etc.
