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What is a Fixed Deposit?

Know All About a Fixed Deposit & How it Works?

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Fixed deposit or FD is one the most common financial instruments that most banks offer to their customers. It is a preferred form of investment as it is safer than equity investments. And you even know the returns even before investing the money. It is a safe investment if you want to avert the risk. It can also help you fulfil your long-term financial objectives, including buying a house, the kid's education or retirement planning.

Continue reading to find out what is a fixed deposit and how it works.

Fixed Deposit Meaning 

In a Fixed Deposit, you put lump sum money in your bank account for a fixed time period at a fixed rate of interest. At the end of the time frame of the fixed deposit, you receive the amount you have invested along with the compound interest. 

How Does Fixed Deposit Work? 

To help you understand fixed deposit meaning, we have simplified it for you:

  • A Fixed deposit is a financial provision offered by banks and NBFCs where you can deposit a lump sum of money and yield a higher rate of interest compared to your savings account.
  • The time period for an FD can range from 7 days to 10 years. Once you make the deposit with your bank, it starts earning an interest depending on the duration of the deposit.The main rule of a Fixed Deposit is that the money can be withdrawn before maturity. And if you withdraw before maturity, you will be required to pay the penalty.
  • Fixed deposit offers you flexibility in choosing its time period. In other words, it can be opened for as long as you have idle funds
  • Some banks offer a premature withdrawal facility, but this leads toa lower rate of interest.
  • On the date of maturity, the bank credits the principal amount and interest to the account holder's bank account.

You must know the type of investment and understand its offerings before investing your money. Hence, it is important to understand what is a fixed deposit and also calculate the amount to be invested and the interest you will earn using an FD calculator to help you make a wise decision.

Types Of Fixed Deposits 

Before you set aside an amount for your Fixed deposit, you must know about the different types of fixed deposits which are available in the market. Read to know more:

1. Standard fixed deposit

 A standard fixed deposit requires a person to invest their money for a fixed period of time at a predetermined interest rate. The time period of a standard fixed deposit varies between 7 days to  10 years. This is the most popular FD option chosen by stakeholders.

2. Special Fixed Deposit

Special Fixed Deposits are ''special'’ because they are usually offered for a special time period. A special time period can be between 290 days and 390 days. Special FDs offer a higher interest rate and are a popular choice among various stakeholders.

3. Tax saving Fixed Deposit

Unlike the Standard Fixed deposits, Tax saving fixed deposits cannot be booked for less than a period of 5 years. The amount invested is exempt from tax under section 80C of Income Tax 1961, but the interest generated from the FD is liable to be taxed.

4. Floating Fixed Deposit

In a floating fixed deposit, the rate changes quarterly or yearly and people can avail the benefits of a changing interest rate.
The change in the rate of interest is determined by the Reserve Bank of India guidelines.

For a really long time, Fixed deposits have been an attractive mode of investment for Indians over the years because of the security of the principal amount and how the money grows beside an assured rate of interest. It also gives people a regular source of income through interest, which they can either claim or reinvest. With banks offering better interest rates to their investors, fixed deposits' popularity will definitely increase with time.

Features Of Fixed Deposit

In the above section, we have discussed the different types of fixed deposit meanings. Now you should also be aware of the key features of a fixed deposit to effectively understand what is a fixed deposit and if it is suitable for you:

  • The amount can be deposited only once. If you wish to make additional deposits, you should start a new Fixed deposit.
  • The rate of interest is higher than the savings account.
  • The duration ranges anywhere between 7 days and 10 years.
  • Fixed deposits can be renewed without any hassle.
  • Withdrawals cannot be made before the maturity period. In case of an emergency withdrawal, a penalty must be paid by the account holder.

Benefits Of Fixed Deposit 

Now that you know the fixed deposit meaning and its features, read along to know the several benefits it offers:

1. Assured Returns 

One of the main advantages of investing in a fixed deposit account is that it assures returns. This means zero risks in comparison to other forms of investments like mutual funds. On maturity of the FD, you will receive a fixed interest rate on the money you invested.

2. Easy to open 

You can open a Fixed Deposit account in a matter of a few minutes. You can either apply for it online or walk into your nearest bank branch and ask an executive to open it.

3. Higher rate of interest 

Fixed deposits enable people to earn a higher rate of interest in comparison to their savings account or any other form of term deposit.

4. Flexible Tenure 

You can choose to open a fixed deposit account for a period of 7 days to 10 years.

5. Multiple FD accounts

You can hold more than one FD account at a given point in time. Whenever you wish to make an additional investment, you can always open a new FD account.

6. Additional Tax Benefit4 

You can claim for a tax exemption under Section 80C of the Income Tax Act of India 1961 for a sum of up to INR 1,50,000.

How to Open an FD Account? 

Now that we know 'what is a fixed deposit?', let us see how you can open one. The Fixed Deposit account can be opened both online and offline.

Online Process 

As an investor, you can easily open an FD account online and avail of benefits such as easy payment, closure, and renewal. The process may vary from bank to bank. Here is the general procedure that you need to follow to open an FD account online: -

  • Visit the official website of the bank of NBFC, where you want to open a fixed deposit account.
  • Create an ID or log in to your existing ID.
  • Select the FD account option.
  • Fill in the necessary details such as principal amount, nominee, tenure, etc.
  • Confirm your detail and make your payment.
  • Make sure to download the receipt for future reference.

Offline Process 

You can open an FD account in any bank you want, even if you are their existing account holder. Whether you have an existing account with the bank or not, the process for opening a FD account remains the same. Here are the steps: -

With an existing account: Fill out the FD application form and submit it to your branch.

Without an existing account: Along with FD application form, you will be required to provide identity proof, address proof, and some other documents to complete your KYC.

Taxation of FD 

The interest you earn on your fixed deposit is taxable. First, it is added to your income and then taxed at the slab rates that apply to your income. You must declare it on your tax return under the category 'Income from other sources'.

It is important to remember that TDS is withdrawn only when the FD interest rate is credited and not when the FD matures. Therefore, if you have a 3 year FD, the tax on the FD will be deducted at the end of every year.

Banks deduct tax at source (TDS) when crediting interest to your account if the amount of interest exceeds ₹40,000. But the limit for senior citizens is ₹50,000.

How is Interest of FD Calculated?

What is a Fixed Deposit? – It is a reliable investment to preserve and grow your savings. The rate of interest on your fixed deposit depends on the tenure and the frequency of payouts.

The interest of FD can be calculated using the following formula: -

A = P(1 + r/n)^n*t

Where,

A: Maturity amount

P: Principal amount

r: rate of interest

n: compound interest frequency

t: Number of years

The interest payout of fixed deposit's maturity depends on the rate prorated by the bank and the frequency of payouts. The interest of principal amount is calculated either as simple interest or compound interest. The amount payable at the end of maturity Is higher in the case of compound interest as interest is calculated on the principal after every compounded.

Who is Eligible?

The following entities are eligible to open a Fixed Deposit account in India: -

  • Indian residents
  • NRI
  • Minors
  • Senior Citizens
  • Partnership Firms
  • Companies
  • Societies and Clubs
  • Sole proprietorship
  • Individuals or Joint investors

The following entities are eligible to open a Fixed Deposit account in India: -

  • Indian residents
  • NRI
  • Minors
  • Senior Citizens
  • Partnership Firms
  • Companies
  • Societies and Clubs
  • Sole proprietorship
  • Individuals or Joint investors


How Can Fixed Deposits Improve Your Financial Portfolio?

As we come close to answering the question – ‘What is a fixed deposit?’, you might think whether a saving plan can truly help in improving your financial portfolio.

Here are some tips on how a fixed deposit can help you do that:

1· Link your savings account with a bank FD 

You can automatically transfer the money into a fixed deposit from your Savings Bank account when the balance in it crosses a certain amount, say Rs 25,000. Depending on your bank account, you can link them to your savings account enabling automatic transfers in multiples of Rs 5,000 to a fixed deposit.

On the other hand, you can also choose to do a recurring deposit from your Savings Account. This would instill in your financial discipline and ensure that you have regular savings. Make sure that your ' 'FD's time frame matches ' 'you're your goals. Besides, choose between the cumulative plan and monthly or quarterly interest payout plans considering your liquidity and cash-flow requirements.

2· Flexible with your financial goals

For instance, if you wish to opt for a short-term goal which is just for a few months, then you should select a short-term fixed deposit. On the other hand, if you wish to opt for a long-term goal, choose a long-term-based Fixed Deposit. In both cases,  you must choose the 'reinvestment of 'interest' plan so that you create more wealth for yourself.

3· Payout Flexibility

If you wish to draw a regular source of income from the fixed deposit, choosing monthly or quarterly interest payouts directly to your bank account will help you to handle your cash-flow needs.

Try to save your money through a Fixed Deposit when the interest rates are good so that it can yield a better rate of return and probably counter inflation.

4· Other Tips

  • Also, beware of banks offering extraordinarily high interest rates – as you could be risking your capital.
  • Avoid the habit of prematurely withdrawing your FD. Premature withdrawals obstruct the wealth creation process and curbs the power of compounding. And if a situation arises where you need the money before the Fixed Deposit matures, you can always opt for a loan against your FD.
  • Also, make it a point to renew the FD if your FD is maturing and you 'don't need the money urgently.
  • By renewing your money, you will create more wealth for yourself and your family in the long run.

A fixed deposit boosts your morale and reaffirms your financial security.The best thing about an FD is that it is convenient and hassle-free. Once you understand what is a fixed deposit and how it works, you can choose to open an FD online or offline, depending on your comfort level.

Frequently Asked Questions (FAQs)

Q1. What documentation is required to open a senior citizen Fixed Deposit?

A: While opening the fixed deposit account, the customer needs to provide proof of age establishing that he/she is a Senior Citizen. To accomplish this, either of the following can be submitted:

  Secondary School Leaving Certificate

  • LIC Policy
  • Voters Identity Card
  • Pension Payment Order
  • Birth Certificate issued by the competent authority
  • Passport
  • Defense ID Card/Government ID Card (Provided they have the cardholder's photo, signature and date of birth)
  • PSU Issued ID Cards
  • Senior Citizen Cards issued by Indian Airlines/Indian Railways
  • PAN Card

Q2. Is Age Proof required for all the subsequent Deposits?

A: All subsequent Fixed Deposit applications need to be accompanied by proof of age.

Q3. Is FD transferable?

A: No, FD is non- transferable.

Q4. What are the ways of funding an Online Fixed Deposit account? When will the money get credited to my fixed deposit account?

A: To open online fixed deposit account, you can pull funds from other bank accounts via Netbanking, UPI and debit card. If you are an existing account holder in IndusInd Bank, you use net banking to book an online fixed deposit.

Q5. Who are eligible to open Max Life insurance Fixed Deposit account?

A: To open an online fixed deposit with Max Life insurance, you need to meet the following criteria:

  • Should be a citizen of India
  • Should be more than 18 years
  • Should have a valid KYC documents such as PAN and Aadhar

Sources:

https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=3654

https://www.indiapost.gov.in/VAS/DOP_PDFFiles/SBORDER12020.pdf

https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=3654#:~:text=15%20lakh%20and%20above%20for,15%20days%20to%207%20days.

https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=3654

https://www.rbi.org.in/scripts/BS_CircularIndexDisplay.aspx?Id=3654#:~:text=15%20lakh%20and%20above%20for,15%20days%20to%207%20days.

 https://www.indiapost.gov.in/VAS/DOP_PDFFiles/SBORDER12020.pdf

ARN No: Feb22/Bg/25

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