What Is Fixed Deposit (FD): Its Calculation, Interest Rates And How to Open a FD Account

FDs are low-risk investment options that are quite popular among the salaried working class population. FDs allow you to invest a certain sum of money for a fixed period of time at a specified interest rate. This tenure could vary from 7-10 days to 10 year. Fixed deposits, also known as term deposits, are probably the safest mode of investment and are not affected by market fluctuations.

Certain FDs provide tax-saving benefits (tax-saver FDs) under Section 80C. All you have to do is open a Fixed Deposit account in any bank, post office or NBFC by visiting the branch or online and deposit money for a specific tenure to earn interest over it.

FD interest rates vary from lender to lender. With RBI (Reserve Bank of India) hiking its repo rate, FDs are seeing some sort of revival with most banks increasing their FD rates. Fixed deposits are a worthy alternative for risk-averse investors considering FDs offer guaranteed returns over a fixed period of time, irrespective of market conditions. 

How Does Fixed Deposits Work?

You can consider investing in FDs similar to lending money to a bank or financial institution. When you invest a sum in FD for a fixed period, the bank guarantees you to return the sum of money along with the specified interest after the maturity period is over. Unlike recurring deposits, where there’s flexibility to withdraw money before maturity period, premature withdrawal for FDs could come with a penalty fee. 

However, there are banks who don’t charge any fee for premature withdrawal. Also, certain banks also offer loans against fixed deposits. But try not to go for premature withdrawal so that you don’t lose out on the interest earned after maturity.

FD interest rates usually depend on the tenure. A 7-day short term fixed deposit account would carry a lower interest rate than a 1-year FD account. Certain banks have a limit set up to which you can invest in the FD account.

Benefits of Fixed Deposit (FD)

Here are some of the benefits of fixed deposits:

1. Low-Risk Investment

FD is considered one of the safest investment options in the market when compared to other investment options like mutual funds, stocks, bonds, etc. FDs offer fixed interest rates over a specified period that do not fluctuate with market conditions.

2. Guaranteed Returns

FDs are the only investment vehicle that offer guaranteed returns. The interest rate is fixed throughout the tenure and you get to enjoy assured returns after the maturity period.

3. Easy Investing

Opening an FD account with financial institutions is a breeze. You can open an FD account online and offline. To open an FD account online, all you need to do is select the amount you want to deposit and the tenure. 

4. Power of Compounding

Customers can reinvest the amount of FD for a selected period. In this context, compound interest means receiving interest not only on the amount of capital but also on the interest earned.

5. Easy Reinvestment

When a savings account expires, the customer can instruct the bank to credit the amount or reinvest the amount for another specific time period.

6. Tax Benefits

You can opt for tax saver FDs which usually come with a lock-in period of 5 years, meaning you cannot withdraw the amount before the end of the 5-year tenure. You can claim a maximum income tax deduction of Rs.1.5 lakh under Section 80C of the income tax act with tax-saver FDs.

7. Loans Against FD

Certain financial institutions also offer loan against FDs. Let’s say you have Rs.20 lakh in your FD account and you need Rs.5 lakh urgently. In such a situation, you can ask your bank to give you a loan against your fixed deposit. For loan against FD repayment, banks generally offer flexible repayment tenures. However,  there’s one critical terms and condition attached i.e., the loan tenure should not exceed the FD tenure held with the bank.

8. Higher Interest Rate for Senior Citizens

Banks offer higher interest rates to senior citizens, usually above 0.25% – 0.75% of the normal FD rate, to senior citizens. This could be a viable investment option for senior citizens looking to earn interest on their savings after retirement.

Also Read

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Tax Saving Fixed Deposit in India: Deductions Under Section 80C

Types of Fixed Deposits

Here are the types of FDs available:

1. Standard FDs

Investors deposit money in their FD accounts for a fixed period that can range anywhere between 7 and 10 years. Fixed and predefined interest rates are higher than interest rates on regular savings accounts. Credit and overdraft features are available for standard FDs. You can withdraw money before your account expires, but you will be penalised.

2. Tax-Saving FDs

These FDs have a lock-in period of 5 years, meaning you cannot withdraw or break your FD before the tenure (5 years) ends. However, tax-saving FDs let you claim tax exemption of up to Rs 1.5 lakh under Section 80C of the Income Tax Act. 

3. Cumulative FDs

Cumulative FDs would pay you the principal and interest at the time of maturity. The interest gets reinvested every year, meaning you would receive a lump sum amount at the end of the tenure instead of getting regular payouts. You get to benefit from the power of compounding with cumulative FDs.

4. Non-Cumulative FDs

With these FDs, you can choose the interest payments – monthly, quarterly, half-yearly or annually – based on your needs. It is suitable for those who are looking for a regular source of income. However, with non-cumulative FDs, you won’t be able to reap the benefits of the power of compounding,thereby losing out on earning interest over interest.

5. Senior Citizen FDs

These are for people over the age of 60. They offer better interest rates than normal FDs, usually 0.25% to 0.75% more than normal FD interest rates.

6. Flexi FD

These FDs provide the convenience and flexibility of both FDs and savings accounts. They combine the features and benefits of FD and savings accounts to provide FD’s higher interest rates (compared to savings account) and savings account liquidity.

How to Open a Fixed Deposit Account?

Investors can open FD accounts both offline and online: 

1. Online Process

The procedure for opening a savings account varies from bank to bank. Different banks have different options. However, most banks or NBFCs follow the pattern mentioned below:

• Visit the website of the bank or NBFC where you want to open an FD account
• Create a new ID or sign in with an existing ID
• Select the Open FD Account option and provide the necessary details (principal, tenure, etc.)
• Please check the details and pay by online banking
• Download the receipt for later reference

2. Offline Process

Investors can open an FD account at any bank of their choice, regardless of whether they are existing account holders. Opening a savings account offline, with or without an existing account, is more or less the same. The first step is to access the branch. The next step is as follows: 

1. For existing accounts: 

• Please fill out the FD application form and submit it to the branch office. 

2. For new accounts: 

• In addition to the FD application, you will need to provide proof of identity, proof of address, and some other documents to complete the KYC.

Documents Required for Opening an FD Account

Customers who already have a savings account at one of the banks do not need to resubmit their documents to meet the FD eligibility criteria. The documents submitted during account opening are sufficient. The following is a document list required to open an FD account. 

1. Proof of identity 

• Passport 
• PAN card 
• Voter card 
• Driver’s license 
• Government ID 
• Ration card
• Senior citizen ID card 

2. Proof of address 

• Passport 
• Phone bill 
• Electricity bill 
• Bank statements

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How to Calculate the Interest on FD Amount?

The FD interest arrives from the following formula: 

Interest = P + (P x r x t / 100) 

Where, 

• P is the principal 
• r is the annual interest rate 
• t is the term

Example 1:

Rs.50,000 was deposited at an interest rate of 6% for five years. 

Interest = Rs.50000 + (RS.50000 x 6 x 5/100) 
Interest =  Rs.50000 + Rs.15000 
Interest = Rs.65000 

Therefore, the interest earned is Rs.15000. 

Example 2:

Example of how compound interest is calculated,

For compound interest FDs, use the following formula: 

M = P + P {(1 + i / 100) t -1}

Where, 

• P is the principal 
• i is the interest rate per period 
• t is the term

For this calculation, let’s look at the below example. 

M = Rs.50000 {(1 + 6/100) 5-1} 

M = Rs.66911.28 

Therefore, the yield is Rs. 16911.28.

Who should Invest in Fixed Deposits?

FDs are ideal for risk-averse investors looking for guaranteed returns. Also, if you are looking to park in a tax-saving investment vehicle, you could go for FDs. Considering the FD rates are going up, you could also invest in FDs simultaneously with your mutual fund investments to diversify your portfolio.

Difference Between Fixed Deposit and Savings Account

Also Read

All You Need To Know About Tax On Savings Bank Account Interest

What is a Demand Deposit Account and How Does It Work?

Final Word

Fixed deposits are still a popular choice of investment for most Indians. However, the returns could be less than other investment options like mutual funds or stocks. But then, FDs offer assured returns, meaning you don’t have the risk of losing your money.

In case you are looking for other investment options or want to diversify your portfolio, invest in Navi Mutual Fund. Explore a wide range of low-cost index funds including Navi Nifty 50, Navi Nifty Next 50 and more!

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