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Fixed deposits are financial tools offered by banks to enable investors earn higher interest rates than a regular savings account, till the time of maturity. It is also called as term deposits or time deposits many a times. Money from a fixed deposit cannot be withdrawn before maturity unlike recurring deposits or demand deposits. Investing in fixed deposits is often considered a safe option in comparison to other options like Post Office schemes which are not covered under the Deposit Insurance and Credit Guarantee Corporation unlike the fixed deposit schemes.

FD is commonly used as an acronym for fixed deposit. The duration of a fixed deposit may vary from 7 days to 10 years. The rate of interest for a fixed deposit also varies according to the duration of the fixed deposit and bank policies. It may be as high as 9%. Fixed deposits are known to have limited liquidity but this factor is compensated by interest rate on FD which is usually higher than other savings options. One may or may not need a separate account for creating a fixed deposit, however an FD holder is offered additional benefits like loan against FD on rates which are usually only 1%-2 % higher than the best interest rates on FD offered. Find out more about Benefits of Fixed Deposits (FDs) in India

Fixed Deposit

1. Eligibility of Fixed Deposit-

All residents and minors, along with HUFs, are eligible to open a fixed deposit account. Indians not residing in the country can also book fixed deposits but the rate of interest offered to them is relatively lower than those offered to resident Indians.

2. Duration of Fixed Deposit-

The tenure of a fixed deposit may range from 7 days to 10 years with varying fixed deposit rates. However, tax-saver FDs are booked for a fixed period of 5 years and 10 years.

3. Minimum and Maximum Amount-

The minimum and maximum amount for fixed deposits varies from one scheme to another.. However, in general, there is no maximum limit for the amount that can be deposited under fixed deposits. Minimum amount may vary from as low as Rs 100 to as high as Rs 1,00,000. Tax saver fixed deposits have a maximum limit of Rs 1,50,000 per year. Interests rates offered on deposits below Rs 1 Crore are more than those offered on deposits above Rs 1 Crore for most banks.

4. Nominees of Fixed Deposit-

A fixed deposit holder may have not more than 2 nominees for his/her fixed deposit. Upon death of the depositor, entitled persons who can receive the accrued FD amount are called nominees. A nominee can claim funds only after presenting valid proofs of depositor’s death. The nominee can withdraw the money either just after the death of the depositor or after maturity of the FD scheme.

5. Applicable Income Tax and Tax Deduction-

Although fixed deposit is a secure and profitable medium of investment, the interest earned through it is taxable according to the tax slab of the individual. Banks deduct TDS on interests earned by the investor as per the provisions of the Income Tax Act, 1961. So for example, if you are earning interests at the rate of 8% for a fixed deposit, and you are in the 20% income tax slab, the actual FD interest rates passed down after tax cuts would be 6% only. If the depositor’s taxable income including the interest earned in FDs is below the exempted limit, no tax is charged from the depositor.

6. Loan Against Fixed Deposit-

Fixed deposits also offer the access to funds within short duration without premature withdrawals and at better interest rates. Interest rates on these loans are usually 1-2% higher than interest rates on FDs but are always less than interest rates of personal loans. Loan against fixed deposit can be termed as a method to receive your own money like an overdraft and without paying unnecessary charges.

Fixed deposits have least liquidity and in such a dynamic world, financial emergencies may occur any time. Depositors are tempted to withdraw money from the FDs partially or prematurely but the bank charges a penalty in case the money is withdrawn before maturity. Also, the interest offered also changes.

Depositors get interests at a rate which is lower than the card rate and the rate of interest offered on the day the money is withdrawn. This leads to a huge loss of fund. Instead of withdrawing money from FDs, depositors should opt for loan against FDs. These loans are offered at lower rates of interest as these are classified under secured loans where the FD acts as collateral. Banks offer loan of up to 90% of the FD amount.

The loan against fixed deposit is lent for a period less than remaining tenure of the FD. Even when the loan is disbursed, the bank keeps on paying interest to the investor which is the biggest benefit of this kind of loan.

7. Credit Card Against Fixed Deposit-

Having a fixed deposit can help you get a credit card against it almost instantly. As tt will be a secured credit card, it would, therefore, not necessarily require a good credit history. These cards can in fact help you build your credit history or improve your credit score, provided you use the card responsibly. Find out more at: Optimize your Fixed Deposit for a Credit Card.

8. Withdrawal of Fixed Deposits-

  • Encashment of fixed deposits can be done on submitting the fixed deposit receipt issued.
  • Only amount up to Rs 20,000 can be withdrawn in cheque. Amount above it has to be transferred to the savings or current account of the customer or has to be paid using crossed cheque.
  • The provision of sweep in facility and flexi deposits allow the withdrawal of accrued interest on fixed deposits.
  • No withdrawals are allowed on tax saving deposits before maturity. Tax-saving fixed deposits have a lock-in period of 5 or 10 years. Money can be withdrawn only after maturity for such schemes. However, interest amount can be paid to the depositor monthly or quarterly.

9. Premature or partial withdrawal-

Banks may allow withdrawal of fixed deposit amount before the said term or before attaining maturity by levying a premature withdrawal penalty or closure penalty. The interest rate offered in such cases is the lower than the card rate and the rate offered at present. Partial withdrawals in unit of Rs 1000 are allowed by select banks. However, banks usually charge a penalty at the rate of 1% for the same.

Factors to consider before booking a Fixed Deposit-

Fixed deposits offer high interest rates which motivates investors to invest in these schemes. Proper planning and research can help you earn more on your investments. Choosing a suitable plan is equally important for investing in FDs. Depositors can use fixed deposit calculator to find out the amount they would receive after maturity of the FD scheme. It helps a lot in choosing the suitable FD scheme. Before you book an FD, consider following points and select the plan that meets your requirements.

  • FD Interest Rates- Banks that offer high interest rates are often considered as the best FD schemes. Interest rates offered by banks vary from 3.5% to 8.5% depending on the tenure. Small banks and NBFCs offer relatively higher rate of interest on deposits made for same tenure. FD interest rates for short tenure are similar to that of a savings account interest rate. But as the tenure increases, the interest rate also increases. Senior citizens get an additional of 0.5% interest rate on deposits below Rs 1 Crores. Another scheme for senior citizens provides 8% FD interest rate on deposits below Rs 7.5 lakhs for tenure of 10 years.
  • FD Tenure- Depositors should choose FDs that offer high interest rate for least possible term. If the bank offers same interest rate on FD for 1 year and 2 year deposits, depositors should go for one year FD. They can either choose to continue with the same scheme after maturity or switch to a higher interest paying scheme.
  • Liquidity- Most depositors consider liquidity as the most important factor while selecting a fixed deposit scheme. FD schemes that offer premature or partial withdrawal are often the most sought after schemes. People choose those banks that charge low or no penalty on premature and partial withdrawals over those that are rigid on lock-in periods.
  • Loan against fixed deposits or overdraft- Some banks offer loans against fixed deposits to customers so that they may meet their emergency financial needs without withdrawing money partially or before maturity. The interest rate charged on these loans is 1 – 2% more than the FD interest rate. The reason behind low interest rate is because these loans are secured loans and the FD acts as collateral. Banks often disburse loans amounting up to 90% of the FD value.
  • During times of inflation, fixed deposits become an interesting investment avenue. Because, during times of inflation, a tight monetary policy is adopted thus causing an increase in the lending rates offered to banks. This causes an increase in both their loan rates and fixed deposit interest rates in India thus making fixed deposit a suitable option to invest into.
  • Fixed deposits not only offer good returns but also do not involve any risk at all and are therefore completely secure.
  • The value of deposits can be easily used to avail loans against the same. Generally 80-90% of the amount of fixed deposit value is easily sanctioned as loan amount.
  • Fixed deposit is an efficient method to save on your taxes. Tax saving FD FDs with a lock in period of 5 years can help one get tax deduction under section 80 C of Income tax act, 1961. A deduction of maximum Rs 1, 50,000 can be claimed.
  • Network branches and ATMs of the respective bank are easily accessible
  • Internet Banking and Phone Banking facilities for a quick check of balance and bill payment
  • Personalized cheques for enhanced security
  • No limits on the amount deposited
  • The savings account interest rates range from 4% to 6% p.a. whereas FD interest rates range from 4% to 8% p.a. depending on the tenure for which the investment has been made.
  • Facility to link loan EMIs or RD deductions through the savings bank account
  • A separate receipt is issued for every FD, because every fixed deposit is considered as a separate contract. This receipt known as Fixed Deposit Receipt (FDR) has to be surrendered to the bank at the time of encashment or renewal.
  • In general, the interest on fixed deposit is deposited every 3 months to customers, savings account or is sent to them through cheque starting from the date of deposit.
  • The customer can also choose to reinvest the interest earned into the FD according to their will and wish.
  • There is a provision for automatic renewal of FDs offered by banks according to the instructions of the customer for the matured deposit. The customer may choose to renew the deposit for the same duration as of previous deposit, but according to current rate of interest on fixed deposit.
  • In case of premature withdrawals, the interest on fixed deposit is paid according to the prevailing rate of interest on FD at the time of withdrawal. Banks also have the right to levy penalty charge for the premature withdrawal.
  • The highest interest rates on FD are usually offered for the longest tenures of the FDs. These interest rates may however be lower or higher according to the lending policies of central bank.

Tax Saving Fixed Deposit scheme is one good method to avail tax deduction under Section 80C of the Income Tax Act, 1961. A maximum deduction of Rs 1,50,000 can be claimed  by investing in them. Tax saving deposits are of two types – single-holder and joint-holder type deposits. However, tax deductions are valid only for the primary depositor. A minimum of five years and a maximum of 10 years is the acceptable duration for these deposits. No partial or pre-mature withdrawal is allowed on these deposits. Also, the depositor can nominate/authorize someone to withdraw the accrued deposit amount before or post maturity in the event of death of depositor.

Various banks offer interesting tax saver deposit schemes. The table below summarizes bank FD rates for regular as well as senior citizens.

Table for Interest Rates of Tax-saving Bank FDs-
 

 Refer this to know about interest rates offered by various banks on tax saver deposit schemes.

Bank's Name

Rate of Interest

Regular

Senior Citizens

IDFC Bank

7.20%

7.70%

HDFC

6.00%

6.50%

ICICI Bank

6.75%

7.25%

Yes Bank

7.10%

7.60%

Kotak Mahindra Bank

6.00%

6.50%

Deutsche Bank

7.50%

8.00%

IndusInd Bank

6.75%

7.25%

Axis Bank

6.75%

7.25%

Citi Bank

5.75%

6.25%

IDBI Bank

6.00%

6.50%

Fixed Deposit have always been a popular choice for investments, but fixed deposit rates in India always vary and therefore tenure plays a vital role in deciding the profit margins.

According to planners and financial experts, during those times when bank interest rates in India are comparatively higher, one should choose the longest possible tenure to make maximum profit. However, other factors like your risk and age must also be considered while deciding the tenure. The following explains it in further detail.

For age-group of 20- 30/35 Years- Youngsters in this age bracket are likely to have no liabilities or bare minimum ones. Therefore a longer tenure deposit would be a wise choice for them. However, long term deposits must be avoided if one has just started working and is unclear about his/her future goals. One can go with one to two year deposits in such cases, thus fetching time to build up some capital while the FD amount may be used in sudden need of a lump sum amount.

Youngsters may also utilize the option of using fixed deposit with the best FD rates for wealth creation. However this option is not suggested if one holds some kind of liability like education loan or home loan. In this case using fixed deposit amount for prepaying off the loan is more advisable, rather than bearing higher interest rates for the loans while earning much lower interest from the deposited amount. For more information regarding FDs for new investors, also read, Fixed Deposits: Ideal Investment Option for Beginners.

For age bracket 35-50 Years- The people from this age bracket bear the additional advantage from the decent cushion of already built-up capital. They might however have near term necessities, hence tenure of 2- 3 years is most suitable for them for parking their funds effectively in the bank.

Many insurance policies do not guarantee health insurance cover for parents under the health insurance provided by their employer. And many a times parents do not have a separate cover of their own. With no health insurance cover, one might need money for a medical emergency so short term fixed deposits of one year or less duration are suggested for individuals.

Fixed deposits may go out of list if one has already started planning for their future at their thirties. According to investment experts, many people from this age bracket are most likely to have invested in mutual funds or through unit- linked plans/mutual funds for their child’s future or for their retirement plans. These equity and long term investments are often exempted   from the taxes, hence not only the tenure but also the investment option must be carefully considered before making a decision.

For the age group of 50 and above- People in this age group are near retirement or have already retired. Hence for people in this age bracket a long deposit term of 3 years or more is suggested. Longer tenure deposits will not only ensure a sustained quarterly/yearly income through interest earned but also will help one save the post retirement corpus. The additional tax benefits that it provides are one more reason to go for longer tenures. 

Especially at this point of time, where interest rates are likely to change in frequent intervals, long term FDs will be a great help to cope with the interest rate movement shocks. This will ensure that the interest based income of people in this age bracket remains untouched even if the rates fluctuate frequently. Using FD calculators can help in making better decisions regarding fixed deposit schemes.

Both FDs and RDs are fixed income products offered by a range of banks. In both of these cases a fixed tenure and a fixed amount is pre decided upon which a fixed interest is receivable at the time of maturity. People often keep wondering- Which is the best bank for fixed deposit or recurring deposit? They also calculate interest on FD and conduct fixed deposit interest rates comparison before making an investment choice. To make better and informed decisions while drawing maximum benefits, one must know what a fixed deposit and recurring deposit is all about. Investors can use the recurring deposit calculator to find out the interest and total amount they will receive after maturity. Further reading will clear all your doubts about the same.

  • Amount Invested: Recurring Deposits have no fixed maximum or minimum limit generally. Although some banks have a monthly investment limit of Rs 1,000 for the minimum and Rs 15 lakhs for the maximum. For FD there is no maximum limit on the amount that can be invested, however the minimum limit is RS 5000 for most of the banks.
  • Deposit Term: Recurring Deposit may have a term ranging from 1 year to 10 years, where the depositor pledges for a fixed amount at regular intervals over the tenure opted for. As stated previously, the tenure for FD varies from 7 days to 10 years, and the depositor may choose any tenure according to his/her comfort.
  • Interest offered: For RDs the first installment earns amount equal to 12 month interest, the next one acquires interest for 11 months only , while the third one gets it for 10 months and so on and so forth. For FDs the interest is earned in a compounding manner on the entire amount deposited starting from the initial lump sum amount. FD interest rates are comparatively higher than RD interest rates, slightly though.
  • Tax: There are no tax benefits associated with RD, and the interest earned is in fact taxable. Also interest earned through FD is also taxable if it goes past the margin of Rs 10,000. Tax deductions can also be claimed for fixed deposits for tenure of 5 years or more.
  • Withdrawal: Both FD and RD have similar terms and conditions for withdrawal. The amount can be withdrawn upon maturity along with the applicable interest. However a penalty is charged for any premature withdrawals.

Read more about differences between FDs and RDs at- FD vs. RD: What Sets Them Apart

Fixed Deposit FAQs

Who can invest in fixed deposit schemes?

Resident individuals, private and public limited companies, Hindu Undivided Families (HUF), partnership firms and societies can book fixed deposits. Some banks and NBFCs including India Post allow minors above the age of 10 years to open fixed deposits. They have to get the FD scheme registered in their name when they attain 18 years of age.

What is the minimum and maximum tenure of FD schemes?

The tenure of FD schemes varies from as less as 7 days to as long as 10 years. Tax saving FD scheme has a lock-in period of 5 years and 10 years. Some senior citizen schemes that offer 8% interest rate on deposits up to Rs 7.5 lakhs have tenure of 10 years.

When and how will the investor receive the interest amount?

There are two types of FD schemes- traditional schemes, where the interest amount is paid to the depositor monthly or quarterly and the reinvestment scheme, where the interest earned is reinvested in the FD scheme. This option to reinvest the interest or get the interest on a monthly basis is provided at the time of booking the FD.

Can depositors get interests on a monthly basis?

Yes, fixed deposits can be modified to get interests on a monthly basis like pension schemes. The interest is paid to the investor on a monthly basis if he chooses the monthly payout of interest option at the time of booking the FD.

What is the lock-in period of Tax Saver FD scheme?

Tax Saver FD scheme has a lock-in period of 5 years and 10 years. These FD schemes have the lowest liquidity.

What benefits are offered to senior citizens under FD schemes?

Senior citizens get an additional of 0.50% interest on the same FD scheme on deposits below Rs 1 Crore. Non-resident senior citizens do not get the above-mentioned benefits.

Can FDs be broken before maturity?

Depositors can withdraw money partially or prematurely but the bank charges a penalty at the time of withdrawal. The interest rate offered by the bank also may decrease if the rate of interest on the day of withdrawal is lower than the card rate at which the FD was booked.

Can an investor take loans against fixed deposits?

Many banks offer loans against fixed deposits. Applicants can get a loan of up to 90% of the FD amount. These loans are offered for a period less than or equal to the remaining FD tenure. Interest rates charged on these loans are 1 – 2% more than the FD interest rate which is still lower than the interest rate charged on personal loans.

Financial emergency can occur anytime and arranging funds during this period is very important. Loan against FDs are a great option during this period. The bank provides these loans at low interests and the depositor gets interest on FDs even after the loan is sanctioned.

Can minors open fixed deposit accounts?

Many banks and NBFCs offer FD investment options to minors. India Post offers fixed deposits to minors above the age of 10 years. But the minor has to get the FD transferred in his name when he reaches the age of 18 years.

Do banks provide more interests on long term deposits?

Banks offer low interest rates on deposits made for short tenure. Interest rates offered for less than 6 months are similar to the interest rate offered on savings account. For fixed deposits booked for longer periods offer higher interest rates. Generally, banks offer highest interest rates on deposits made for 2-5 years.