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 terms deposits or time deposit 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  Money from a fixed deposit cannot be withdrawn before maturity unlike recurring deposits or demand deposits.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 fixed deposit may vary from 10 days to 10 years. The rate of interest for fixed deposit also varies according to the duration of the fixed deposits and the 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 need a separate account for creating a fixed deposit, however an fd holder are offered additional benefits like loan against fd on rates which are usually only 1%-2 % higher than the best interest rates on fd offered.

Key Features of Fixed Deposit-

Fixed Deposit

1. Eligibility of Fixed Deposit-

All the residents and minors along with HUL are eligible to open a fixed deposit account.

2. Duration of Fixed Deposit-

The tenure of a fixed deposit may range from 7 days to 10 years with varying fixed deposit rates.

3. Minimum and Maximum Amount-

Rs 5000 is the usual limit for minimum amount of fixed deposit. However in general there is no maximum limit for the amount that can be deposited under fixed deposits.

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.

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. So for example if you are earning interest 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.

6. Loan Against Fixed Deposit-

Fixed deposits also offer the access to funds within short duration without premature withdrawals and at better interest rates. The interest rates on these loans are usually 1-2% higher than the interest rate on fd but is always less than the 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.

7. Credit Card Against Fixed Deposit-

Having a fixed deposit can help you get a credit card against it almost instantly. It is a secured credit card and therefore does not necessarily require a good credit history. These cards can in fact help you to improve your credit score and use your credits responsibly.

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. Amounts above it have 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.

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 paid in such cases is according to the interest rates on the date of deposit and for the duration for which the amount has remained with the bank. Partial withdrawals in unit of Rs1000 are allowed by select banks. However, banks usually charge a penalty at the rate of 1% for the same.

Benefits of Fixed Deposit-

  • 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 a 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 with a lock in period of 5 years can help one get tax deduction under the section 80 C of Indian income tax act, 1961. A deduction of maximum Rs 1, 50,000 can be claimed.

Additional Features-

  • 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 Deposits-

Tax Saving Deposits 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. ATx saving deposits are of two types – single-holder and joint-holder type deposits. However the 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 type of 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 below table summarizes details like canara bank fd rates along with others. Refer this to know about the interest rates offered by various banks on the tax saver deposit schemes.

Table for Interest Rates of Tax-saving Bank FDs-
 

Banks

Tax-Saver FD interest rates

General

Senior Citizens

Canara Bank

7.00%

7.50%

State Bank of India

7.00%

7.25%

Axis Bank

7.25%

7.75%

HDFC Bank

7.25%

7.75%

IDBI Bank

7.40%

7.90%

Role of Tenure in Fixed Deposits-

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 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. 

Fixed Deposit v/s Recurring Deposit-

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. 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.