Fixed Deposit or FD is one of the safest investment options that guarantee consistent interest rates on the principal amount. It is a great investment if you want to avert the risk. It can also help you fulfil your long-term financial goals, including buying a house, the kid's education, or retirement planning.
In this article, let us understand everything you need to know about fixed deposits and FD interest rates, including their features and taxation on FD.
What is a Fixed Deposit?
A fixed deposit account is an investment method through which you invest a lump sum or a small amount of money in your bank at a fixed rate of interest for a fixed period of time. The tenure for a fixed deposit can be anywhere between 7 days and 10 years. The principal amount is received on maturity, and you can choose to receive the interest on FD at regular intervals or at the time of maturity.
FD Interest Rates | Everything You Need to Know
To help you understand how a fixed deposit works, here is a step by step breakdown of the process
- Firstly, opening an FD account is different from opening a Savings or a Current account. In the case of fixed deposits, you invest a specific amount of money that is blocked for a specific period of time. In other words, you are not allowed to withdraw the money before the scheduled date.
- Nonetheless, you will get the flexibility of choosing the time period or tenure of the deposit.The time frame can be a minimum of 7 days and the maximum time period can be up to 10 years.
- Once you have selected the time period, the bank will offer you the interest rate based on the amount you invested, and when the deposit tenure ends, you will earn a good amount of interest.
- In simple terms, your interest income is added to your principal amount after a specific time interval, and it leads to an increase in the invested money.
- You can either choose to receive the interest at the time of maturity or you can choose to receive it on a monthly, quaterly, half-yearly, yearly payout basis.
Fixed Deposits are safe, risk-free, and offer guaranteed returns since FD interest rates remain constant. But it is essential to compare the FD rates offered by different banks in the country before investing in a fixed deposit or renewing an existing one. You must look for the highest FD interest rates available to gain maximum returns.
Features of a Fixed Deposit
Creating wealth is a tough task. It requires the perfect balance between investment and risk. One easy way to create wealth is to invest your money in a fixed deposit. To help you understand a fixed deposit, you should know about its key features. Read them as they will enable you to make a smart decision.
1. One Time Deposit Investment
In a Fixed deposit account, the amount of money can only be deposited once. To create more wealth, you will have to open separate FD accounts.
2. High Rate of Interest
The rate of interest is higher in a fixed deposit account as compared to a savings or current account.
3. Flexible Tenure
The time period of a fixed deposit account can range between 7 days to 10 years. You have the flexibility to choose the tenure period at your convenience.
4. Renewal Option
A fixed deposit account can be renewed without any worry.
5. Premature Withdrawal
Last but definitely not the least important, withdrawals from a fixed deposit account cannot be made before the maturity period. In case of an emergency withdrawal, the customer will have to pay the penalty.
Understanding FD Interest Rates
A Fixed Deposit Interest rate is defined as the interest rate which is paid by the bank to the account holder for investing their money in their respective bank. Different banks offer different rates of interest on Fixed deposit accounts. If you are confused about which bank to opt for to open an FD account, make use of this simple formula
A = P (1 + r/4/100) ^ (4*n) or A = P (1 + r/25)4n
Here, A stands for the amount on maturity, P stands for the amount deposited, and n stands for the frequency of compounded interest
Taxation of Fixed Deposit Interest Rate
The Interest on Fixed Deposit is completely taxable. Here is a step-by-step procedure to explain to you how the interest income is taxed in an FD account.
- First, add it to your total income and get taxed at slab rates applicable to your total income. It will be reported under the head ‘Income from Other Sources’ in your Income Tax Return.
- Banks deduct tax at source at the time of crediting interest to your account if the amount of interest is beyond Rs.40,000 for individuals other than senior citizens. In the case of senior citizens, the threshold is Rs. 50,000.
- Therefore, you should note down that the TDS is deducted at the time of credit of interest and not when the FD matures. So, if you have an FD for 3 years – banks shall deduct TDS at the end of each year.
- You can deposit a maximum of Rs. 1.5 lakh a year under Section 80C. There is also tax deducted at source (TDS) on FD. If your interest earned from FD is more than Rs 10,000 in a year, TDS will be deducted. In case your income is less than the income-tax exemption limit, kindly fill out the form 15G/15H for non-deduction of tax on FD interest.
- The Income Tax Department will adjust the TDS (which has already been deducted) against your final tax liability.
- If the bank does not deduct TDS from your interest income, the total interest income earned from your fixed deposits in a particular financial year will be added to your total income, and then you will have to pay tax on it.
- Experts suggest not to wait until your FD matures and when the interest is received to report the interest income. This is because the accumulated interest may push you up to a higher slab and you may end up paying more taxes.
Also, you can view the details of TDS deducted on any of your income by viewing your Form 26AS.
FD Interest Rates: Things to Remember
To make sure that you invest in the right FD, keep in mind these pointers to make the right decision.
FD interest rates depend on various factors. The interest rate ranges from 2.50% to 9%, depending on these factors. So, let us have a look at the factors which determine FD rates.
1) Type of Financial Institution Offering the Scheme
Banks, post-offices, and Non-Banking Financial Companies (NBFCs) are responsible for offering fixed deposits. All these institutions provide different FDrates on their deposit schemes.
2) The Amount of Deposit
Another factor that governs the FD interest rates is the amount that is being deposited. Usually, interest rates are different for amounts up to Rs.2 crores or Rs.5 crores. If the amount is higher than these limits, the FD rates may differ.
3) The Tenure of the Deposit
The tenure of deposit also affects the FD interest rates. Fixed deposits are available for tenures ranging from 7 days to 10 years. Thus, the tenure of the deposit you choose would specify the FD rates. Usually, the higher the deposit tenure, the higher FD interest rates are offered.
4) The Type of Depositor
FD interest rates are different for investors aged below 60 years of age and for those who are senior citizens. Senior citizens enjoy up to a 0.40% higher FD rates compared to non-senior citizens. This is perhaps why fixed deposit schemes are so popular among the older population of the country.
5) The Type of Fixed Deposit Scheme
The type of deposit scheme also affects the FD rates. You can opt for cumulative FDs where the interest earned is added to the amount invested and remains invested in the scheme. Alternatively, you can choose non-cumulative FDs where the interest earned is paid out as regular income during the scheme’s duration. There are flexible deposit schemes too, which allow easy withdrawals during the tenure and the facility of sweep-in or sweep-out from the savings account
Frequently Asked Questions (FAQs)
Q1. How to open an FD account for senior citizens?
A: If you wish to open an FD account for senior citizens, it is prescribed to provide documents ascertaining the age of the account holder. Based on the age concluded from such a document, the bank will confirm if you would like to get interest rates and other benefits applicable to senior citizens and do the needful.
Q2. How will I receive the maturity amount of the FD?
The bank will transfer the maturity amount, i.e. the principal amount and the interest amount, to the connected savings account held with the bank.
Q3. How do we use the Fixed Deposit (FD) Calculator?
A: You can use the FD Calculator to calculate interest and maturity amount on the Fixed Deposit
Q4. What is reinvestment or cumulative FD?
A: In reinvestment or cumulative FD, interest is compounded quarterly and reinvested with the principal amount. The maturity of these fixed deposits ranges from 6 months to 10 years.
Q5. What is the tenure of Fixed Deposit?
A: Choice of Plans:
Traditional Plan: Earn interest monthly/quarterly basis as per your convenience with a maturity period ranging from 7 days to 10 years.
Reinvestment Plan: Earn interest compounded quarterly and reinvested with the principal amount with a maturity period ranging from 6 months to 10 years.
ARN No: Feb22/Bg/24