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.
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.
Here are some of the benefits of fixed deposits:
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.
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.
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.
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.
When a savings account expires, the customer can instruct the bank to credit the amount or reinvest the amount for another specific time period.
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.
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.
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.
Here are the types of FDs available:
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.
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.
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.
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.
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.
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.
Investors can open FD accounts both offline and online:
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:
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:
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.
The FD interest arrives from the following formula:
Interest = P + (P x r x t / 100)
Where,
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 of how compound interest is calculated,
For compound interest FDs, use the following formula:
M = P + P {(1 + i / 100) t -1}
Where,
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.
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.
Basis Of Difference | Fixed Deposit | Savings Account |
Interest Rate | Interest rates are higher in case of a fixed deposit. | Savings accounts have lower interest rates. |
Tenure | The tenure for a fixed deposit ranges between 7 and 10 years. | There is no fixed tenure for savings accounts. |
Loans | A fixed deposit acts as collateral in the event of availing of a loan facility. | There is no loan facility offered by a savings account. |
Withdrawal | There is a facility of premature withdrawal before exiting a fixed deposit. | Account holders can withdraw money from their savings account anytime, provided they maintain the minimum balance. |
Tax Benefits | Tax-saver FDs offer tax benefits of up to Rs.1.5 lakh | You cannot claim tax benefits for a savings account |
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!
Ans: Yes. If you need money urgently, you can withdraw money from your FD account by the due date. This is called early withdrawal. You can also partially withdraw the desired amount from your FD account. However, it is not advisable to withdraw early by the due date, as banks will reduce FD rates in accordance with regulations.
Ans: TDS does not apply to interest rates ranging from 5,000 to 10,000 rupees (depending on the financial institution). If the investor’s total income is below the tax limit, you can submit Form 15G / 15H when opening an FD account to avoid tax credits.
Ans: Banks and other financial institutions offer depositors the opportunity to nominate in the face of contingencies. The nominee can claim the fixed deposit amount at maturity if the depositor dies. However, this depends on how you hold it.
Ans: One of the advantages of FD is that you can get a loan. In the event of a financial emergency, instead of breaking the FD before it expires, you can take out a loan against the FD. This is a way to avoid you losing interest in your deposit. Banks can offer loans between 60% and 90% of the deposit amount.
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