Saving money is one of the most difficult things nowadays as increasing inflation is making it quite impossible. However, there are several investment options that let us save money by investing in it for a certain period of time. And one of them is a fixed deposit.
Fixed deposits are considered a low-risk investment option as they provide a guaranteed return on investment, making them a popular choice for those who are risk-averse or looking for a secure way to grow their savings.
What is a Fixed Deposit?
Fixed deposit meaning is a type of investment offered by financial institutions where an individual can deposit a lump sum of money for a fixed period of time at a predetermined interest rate. Fixed deposits are also commonly referred to as term deposits because the money is invested for a specific term or period, ranging from as short as 7-14 days to as long as 10 years.
When an individual opens a fixed deposit account, they are guaranteed a specific rate of interest for the duration of the investment, regardless of any changes in the market or economy. The interest rate offered on a fixed deposit is usually determined by the duration of the deposit. Typically, the longer the duration of the fixed deposit, the higher the interest rate offered.
Fixed deposits are considered to be a low-risk investment option because they provide a guaranteed return on investment. The money invested in a fixed deposit is locked in for the duration of the term, which means that individuals cannot withdraw their funds before the maturity date without incurring a penalty fee.
How Does Fixed Deposit Work?
A fixed deposit works by an individual depositing a lump sum of money with a financial institution, such as a bank or a non-banking financial company (NBFC), for a fixed period of time at a predetermined interest rate. The interest rate offered on a fixed deposit is usually determined by the duration of the deposit. Typically, the longer the duration of the fixed deposit, the higher the interest rate offered.
Once an individual opens a fixed deposit account, the deposited money is locked in for the duration of the term, which means that individuals cannot withdraw their funds before the maturity date without incurring a penalty fee. The deposited amount remains with the financial institution, and the institution uses the deposited funds to lend to other borrowers.
During the fixed deposit term, the individual earns interest on the deposited amount. The interest earned can either be paid out at the time of maturity of the deposit or on a periodic basis (such as monthly, quarterly, or annually) as per the individual's choice. If the individual chooses to receive the interest periodically, the financial institution usually deducts the tax at source (TDS) before paying out the interest.
At the end of the fixed deposit term, the individual receives the deposited amount along with the interest earned. The interest earned on a fixed deposit is usually taxable, and the financial institution deducts the TDS before paying out the maturity amount.
Types of Fixed Deposits
Before investing in a fixed deposit, you must be aware of its different types. Here are the details:
1. Standard Fixed Deposit
A standard fixed deposit is a type of investment that is widely popular and offered by various financial institutions such as banks and non-banking financial companies (NBFCs). In a standard fixed deposit, an individual deposits a lump sum of money for a specific period of time, ranging from 7 days to 10 years, at a predetermined interest rate.
The interest rate offered on a standard fixed deposit is usually determined by the duration of the deposit, and it remains fixed for the entire tenure. This provides individuals with a guaranteed return on investment, making it a low-risk investment option. Moreover, the interest earned on a fixed deposit is usually higher than the interest offered on savings accounts, making it an attractive investment option for those looking to grow their savings.
2. Special Fixed Deposit
Special fixed deposits are a type of investment product offered by financial institutions, which are characterized by their unique features and benefits. As the name suggests, special fixed deposits are 'special' because they are offered for a specific time period, which is usually between 290 days to 390 days.
One of the key features of these FDs is that they offer a higher interest rate compared to standard fixed deposits. Banks and other financial institutions use these deposits as a means of attracting new customers and retaining existing ones.
3. Tax Saving Fixed Deposit
Tax-saving fixed deposits are a type of investment product that helps investors save tax while also providing a fixed return on their investment. These FDs have a minimum lock-in period of 5 years, which means that investors cannot withdraw their funds before the maturity date.
One of the key benefits of tax-saving fixed deposits is that the amount invested is exempt from tax under Section 80C of the Income Tax Act, 1961. This means that investors can claim a deduction of up to Rs. 1.5 Lakh on the amount invested in tax-saving FDs in a financial year.
4. Floating Fixed Deposit
A floating fixed deposit is a type of investment where the interest rate varies periodically, usually quarterly or yearly, based on market conditions. The interest rate is not fixed at the time of investment but fluctuates with changes in the Reserve Bank of India's guidelines or market rates.
Floating FDs offer investors the advantage of benefiting from the changing interest rates, which could be higher than the fixed rates offered at the time of investment. However, the returns are not guaranteed, and the interest rate may fall as well, leading to lower returns.
Features of Fixed Deposit
Here are the key features of FDs:
Guaranteed Returns
Fixed deposits are a safe investment option as they offer guaranteed returns. The principal amount invested is protected, and the interest earned is also guaranteed.
Low-risk Investment
Fixed deposits are a low-risk investment option as they are not affected by market fluctuations, unlike other investment options such as stocks and mutual funds.
Easy to Invest
Fixed deposits are easy to invest in as they can be opened with a minimum amount, and the process is simple and hassle-free.
Flexible Tenure
Fixed deposits offer flexibility in terms of tenure, ranging from short-term to long-term investments. This allows investors to choose a tenure that suits their financial goals.
Interest Payment Options
Fixed deposits offer flexibility in terms of interest payment options. Investors can choose to receive the interest payment on a monthly, quarterly, half-yearly, or yearly basis, depending on their preference.
Loan Against FD
If you are in urgent need of funds, you can avail of a loan against your fixed deposit without having to prematurely withdraw your FD. The loan amount you can avail against your FD varies based on the bank's policy, but it typically ranges between 70% to 90% of the deposited amount.
Benefits of Fixed Deposit
Below are the several benefits of having a fixed deposit:
Flexible Tenures
Fixed deposits come with flexible tenures ranging from 7 days to 10 years, allowing you to choose the tenure that suits your investment goals.
High Liquidity
Fixed deposits are highly liquid investments, which means that you can withdraw your money anytime in case of an emergency. However, premature withdrawals may attract a penalty.
Tax Benefits
Tax-saving fixed deposits offer tax benefits under section 80C of the Income Tax Act. This allows you to save on your tax liability while earning guaranteed returns on your investment.
How to Open an FD Account?
You can open an FD account through two modes:
Online Process
Opening a fixed deposit account online is a simple and hassle-free process. The following is a detailed step-by-step guide:
1. Research: The first step is to research various banks or NBFCs offering fixed deposit accounts and compare the interest rates they offer. This will help you choose the best option for your investment needs.
2. Visit the official website: Once you have chosen the bank or NBFC, visit their official website.
3. Create an ID or log in: If you are an existing customer, log in to your account. If you are a new customer, you will need to create an ID by providing your personal details like name, address, phone number, and email ID.
4. Select the FD account option: Once you have logged in, select the option for opening an FD account. This will take you to a page where you can choose the type of FD account you want to open.
5. Fill in the necessary details: Fill in the necessary details such as the principal amount you want to invest, the tenure you prefer, the frequency of interest payouts, and the nominee details.
6. Confirm your details and make the payment: Once you have filled in all the details, verify them and make the payment using your preferred mode of payment like net banking, debit card, or credit card.
7. Download the receipt: After making the payment, download the receipt for future reference.
It is important to note that before opening an FD account, you should read the terms and conditions carefully and understand the penalties associated with premature withdrawal or non-payment of interest.
Offline Process
If you are an existing account holder, you can simply visit the bank branch and fill out the fixed deposit application form. You will need to provide your account details and the amount you wish to deposit, along with the tenure for which you want to keep the fixed deposit. Once you submit the form, the bank will process your request and create a fixed deposit account for you.
If you do not have an existing account with the bank, you will need to complete the KYC process by providing identity proof, address proof, and other necessary documents. This is a mandatory requirement for all financial transactions in India, including opening a fixed deposit account. You can provide any government-issued identity proof such as a PAN card, Aadhaar card, passport, or driving license, and address proof such as utility bills, bank statements, or rent agreements. Once your KYC is complete, you can fill out the fixed deposit application form and submit it along with the required amount. The bank will then create a fixed deposit account for you.
Taxation of FD
Fixed deposits are a popular investment option in India due to their safety and guaranteed returns. However, it's important to be aware of the tax implications associated with FD investments. The interest earned on your fixed deposit is subject to taxation. The interest earned is added to your total income and taxed according to the applicable slab rates.
It's crucial to declare the interest earned from your FD investment on your tax return under the category of 'Income from other sources.'
It’s essential to know that banks will only deduct TDS when the interest is credited to your account and not at the time of maturity. For example, if you have a 5-year FD, the tax on the interest earned will be deducted at the end of each year.
Banks are required to deduct TDS on the interest earned from your FD if it exceeds Rs. 40,000, but for senior citizens, the limit is Rs. 50,000.
Note: TDS rate applicable is based on your total income and the rate specified by the government. If the TDS deducted is more than your actual tax liability, you can claim a refund while filing your tax return.
How is Interest of FD Calculated?
The interest on a fixed deposit is calculated based on the principal amount, the rate of interest, and the tenure of the deposit. The formula for calculating interest on an FD is:
A = P(1 + r/n)^(n*t)
Where:
A = Maturity amount
P = Principal amount
r = Rate of interest
n = Number of times interest is compounded in a year
t = Tenure in years
Let's take an example to understand this formula better. Suppose you invest Rs. 1,00,000 for 2 years at a rate of interest of 6% per annum, compounded quarterly. The calculation for interest earned on your FD would be as follows:
P = Rs. 1,00,000
r = 6% per annum, compounded quarterly
n = 4 (since interest is compounded quarterly)
t = 2 years
Using the formula, we can calculate the maturity amount:
A = P(1 + r/n)^(nt)
A = 1,00,000(1 + 0.06/4)^(42)
A = Rs. 1,12,360.16
Therefore, the total interest earned on this fixed deposit would be Rs. 12,360.16.
Who is Eligible?
Following individuals or businesses can open an FD account:
● Indian citizens
● NRIs
● Senior citizens
● Minore
● Partnership firms
● Companies
● Sole proprietors
● Joint investors
How Can Fixed Deposits Improve Your Financial Portfolio?
Fixed deposits are a popular investment option among individuals who seek a secure and stable source of income. Here are some tips on how to make the most of a fixed deposit:
Link Your Savings Account with a Bank FD
Many banks offer the facility to automatically transfer the balance in your savings account to a fixed deposit account when it crosses a certain amount. This ensures that your savings are invested in a secure and profitable option.
Be Flexible with Your Financial Goals
Different types of fixed deposits are available for various tenures. If you have a short-term goal, opt for a short-term FD, and for a long-term goal, choose a long-term FD. Additionally, choose between the cumulative plan and monthly or quarterly interest payout plans based on your liquidity and cash-flow requirements.
Payout Flexibility
Choose the frequency of interest payouts based on your cash-flow requirements. If you need a regular source of income, choose monthly or quarterly interest payouts.
Beware of High FD Interest Rates
Be cautious of financial institutions that offer exceptionally high FD interest rates as it may be a potential risk to your invested capital.
Avoid Premature Withdrawal of FD
Premature withdrawals can impede the wealth creation process and hinder the power of compounding. Instead, opt for a loan against your FD if you need the money urgently.
In summary, a fixed deposit is a secure and profitable investment option that can provide a stable source of income. By following these tips, you can make the most of your fixed deposit and achieve your financial goals.
Frequently Asked Questions
Here is the list of documents:
● Identity proof
● Address proof
● Age proof
● PAN card
Yes, you are required to submit age proof for all subsequent deposits.
Fixed Deposits are not transferable between banks. However, you can transfer your FD within the same bank from one branch to another.
The ways to fund an Online Fixed Deposit account include online fund transfer, NEFT, RTGS, and UPI. The money will get credited to your fixed deposit account immediately after the successful transaction.
The Max Life Smart Fixed-Return Digital Plan can be purchased by Indian residents aged 18 to 60 years.
The duration for which you should invest in a fixed deposit depends on your financial goals and needs. If you have short-term financial goals, you can choose an FD with a shorter tenure, such as 1-2 years. However, if you have long-term financial goals, you can opt for a longer tenure, such as 5-10 years.
FD accounts offer several benefits, including assured returns on investment, flexible tenure options, minimal documentation, no upper limit on investments, and tax-saving benefits under Section 80C of the Income Tax Act, 1961, if you opt for a 5-year tax saver FD.