Fixed Deposit: FD Meaning, Full Form, Benefits, Types and How Does it Work?

Fixed Deposits have been that one piece of financial wisdom passed down through generations almost like a family recipe. Our grandparents and parents still swear by them. 

Most of the people influenced by them have invested or are thinking of investing in a fixed deposit. Here is a surprising part that we think we understand FDs. It’s just to deposit money and get interest. 

Get Up to 8.30% Returns on Your Fixed Deposit.

No, but the reality is that most people don’t exactly know what FD is? They just invest without knowing how to choose the right FD or use its features smartly. Continue reading to learn about fixed deposits in detail before investing in them- 

Key Highlights

What is a Fixed Deposit?

Fixed deposit is a type of investment where an investor invests a lump sum amount for a fixed period of time at a fixed rate of interest. The tenure and interest rate is fixed at the time of account opening. Fixed deposits have an option to choose interest payout frequency i.e. monthly, quarterly and annually. 

Features and Benefits of Fixed Deposits

Fixed deposits investments come with several benefits making it a perfect choice. Here are some of the features and benefits of fixed deposits-

• Assured returns- Fixed deposits offer a fixed interest rate which ensures assured returns on your investment irrespective of the market fluctuations.
• Flexible tenure-  Fixed deposits offer a wide range of flexible tenure ranging from few days to a decade i.e. 7 days to 10 years. 
• Regular income- FDs have an interest payout option which makes them perfect for regular income.
• Low-risk investment- Fixed deposits are not market-linked having minimum risk. They don’t get affected by market fluctuations making it perfect for low-risk investors. 
• Tax deduction- Some of the FDs like a 5-year tax-saver FD which offers a tax deduction under section 80C of the Income Tax Act.  
• Liquidity- Fixed deposits have a lock-in period but you can access funds availing loan against FD or making premature withdrawal in case of emergency.
• Auto renewal Facility- Most of banks or financial institutions offer auto-renewal facility where FD automatically gets renewed after maturity without any manual interventions. 
• Easy investment- Banks and financial institutions offer an easy investment process online with a few simple steps. 
• Loan against FD- Fixed deposit offers an option to avail loan against your fixed deposit investment. 

How Does Fixed Deposit Work?

When you make a fixed deposit investment you invest a lump sum amount for a fixed period i.e for a few months or years. Fixed deposit interest rates remain the same regardless of fluctuating market rates. Here’s a step-by-step look at how a Fixed Deposit works:

• Once you invest in a fixed deposit the invested amount earns interest till the time it remains invested. 
• You can choose a tenure of investment that can be from seven days to 10 years. 
• The bank provides a fixed interest for the duration of the fixed deposit.
• The interest is calculated on the principal amount and paid periodically or compounded to the principal amount. 
• Once FD matures you receive the principal amount plus the interest accrued. 

Types of Fixed Deposit

Now, you know what is fixed deposit and its benefits, let’s discover what are the different types of fixed deposits-

Regular FD

The regular fixed deposit is the most common fixed deposit availed. This fixed deposit account is for individuals less than the age of 60 years. These fixed deposits offer lower interest rates than what is offered to senior citizens. 

Senior Citizen FD 

Senior citizen fixed deposit is a special FDs designed especially for senior citizens above the age of 60 years. These account holders get a higher interest rate than general citizens and a monthly interest payout option for meeting their monthly expenses.

Tax-Saving FD Account

The tax-savings fixed deposits are accounts offering tax benefits under section 80C of the Income Tax Act,1961. Investors earn a return while saving on taxes. These deposits have a lock-in 5 year period with no premature withdrawal allowed. 

Cumulative Fixed Deposits

Cumulative fixed deposit is the FD which reinvest interest earned every quarter or year. Once the FD matures, you will receive principal plus the interest earned. This deposit is best suited for investors who don’t need to 

Non-Cumulative Fixed Deposits

Non-cumulative fixed deposits are FDs where interest earned is paid on monthly, quarterly, yearly or annually basis. This is best suited for investors looking for a regular source of income. 

Who should Invest in Fixed Deposit?

New investors: Fixed deposits are a good investment option for new investors who need to build a habit of fixed investment. These investors can invest in fixed deposits with a minimum amount and gradually increase the investment. 

Retirement planning: Investors looking for an investment option to build a retirement corpus should invest in fixed deposits. This provides investors with a regular income and saves their investment from market fluctuations.

Short-term goals: Investors who are looking to invest funds for a short-term goal i.e. wedding, vacation or a house down payment, etc. fixed deposits offer different tenures from a few days to years offering varied interest rates which can be used for short-term goals. 

Conservative investors: Fixed deposits are safer and low-risk investment options. Investors looking for low- risk investment options should invest in fixed deposits. 

Emergency fund- Fixed deposits are a good option for building an emergency fund. Investors who want to build an emergency fund can lock their funds in fixed deposits as they have higher interest rates than a basic savings account with easy liquidity option.

ALSO READ: Best Fixed Deposit Rate 

Interest on Fixed Deposit

Interest rates offered on fixed deposits are fixed and remain the same throughout the tenure ensuring the stable returns. Interest rates offered vary for each bank. Here are some of the banks offering highest FD interest rates-

These are the highest FD rates but if you want to know what return you can get on them. You can easily calculate returns on your fixed deposit using a fixed deposit calculator. 

How to Open a Fixed Deposit?

Now, you know how fixed deposits work and how they benefit, let’s check how to open a fixed deposit account. Fixed deposits can be opened both online and offline: 

Online:

• Visit the bank’s website where you wish to open a fixed deposit account.
• Search for the ‘Fixed Deposit’ option.
• Select ‘Open FD’ or ‘Apply’ option.
• Now, fill the online application form.
• Upload all the requested documents.
• Transfer the amount you would like to invest.

FD Account successfully created will receive a message of the registered mobile number. 

Offline:

• Visit the nearest branch of the bank or financial institution.
• Request the FD application form and duly fill it out with relevant details.
• Attach the required documents with the application form and submit them at the counter.
• Now, deposit the amount you want to invest.
• Your application will be processed, and the account will be opened.

Documents Required to Open a Fixed Deposit

Here are some of the documents required for opening a fixed deposit- 

• Proof of Identity like passport, driving licence, Aadhaar, etc.
• Proof of Address like utility bill, bank statement, rental agreement, etc..
• Two passport-sized photographs of each applicant.
• Copy of PAN card or Form 60/61.
• Duly completed Know Your Customer form.
• Cancelled cheque or passbook copy for linking.
• NRI Applicants will need to have passport, overseas address proof, NRI bank statement.
• Corporate/Institutional Entities need to have certificate of incorporation and authorised signatory proof.

FD Maturity 

Fixed deposit maturity is the time when the chosen tenure for which FD was created is completed. Once the FD matures the invested amount plus the interest earned i.e. the maturity amount is paid. Investors can choose to renew i.e. extend the FD tenure or withdraw the amount. If nothing is specified at the time of opening an FD account then the bank deposits the amount to the linked bank account.

Premature Withdrawal Rules for Fixed Deposits

Fixed deposits have a lock-in period where the invested amount is locked and can’t be withdrawn for that particular period. Withdrawing the money before maturity i.e. premature withdrawal is allowed on fixed deposits under certain conditions. 

Here are some of the impact of premature withdrawal- 

• Premature withdrawal comes with a penalty that is deducted from the invested amount. This penalty may vary for different financial institutions and tenure. 
• Premature withdrawal penalty involves a reduction in the interest rate which could range from 0.5% to 1% in some cases it might be higher.
• Premature withdrawal impacts tax liabilities as the TDS is  adjusted on reduced interest rate applicable at the time of withdrawal. 

Overdraft against Fixed Deposit

An overdraft against fixed deposit is another option other than premature withdrawal to access funds when needed. It is an option where you can get credit against your FD value. 

Overdraft against FD is a facility where investors can borrow a required amount using the FD as a collateral without the need to break fixed deposit. 

Depositors can withdraw up to the approved withdrawal limit which varies for different financial institutions. Most of the banks allow around 90% of the FD value to be used for overdraft and the interest rate on it varies from 1-2% higher than FD rate.

It is a convenient way of meeting the need of funds in case of emergencies as investors can get money against FD while still earning interest on it.

FD Nomination

Nomination is appointing someone to get funds after your death. When opening a fixed deposit it is mandatory to add a nominee who will receive the amount after the accountholder's death. Here are some of the rules for FD nomination-

• Fixed deposit holders (individual or joint holder) can nominate a person. 
• Hindu Undivided Families, societies and trusts cannot nominate for fixed deposit. 
• The nominee added should be an individual and not an entity for clarity on ownership of funds in case of death of an FD holder.  
• A Nominee can be added when opening a fixed deposit or later by just contacting the bank.

Tax on Fixed Deposit 

Interest earned on fixed deposits are taxable under income tax Act 1961. The interest is added to the total annual income and taxed according to your income tax slab. 

In addition, banks deduct TDS of 10% if the total interest earned exceeds Rs. 50,000 for general citizens and 1,00,000 for senior citizens. If you don’t provide a PAN card then the bank deducts 20% TDS. 

Investing in tax-saver FD offers a tax deduction of up to Rs. 1.5 lakh under section 80C of the income tax Act.

Minimum Amount for Fixed Deposit

Banks and financial institutions have a set minimum amount that can be deposited to open a fixed deposit account. The minimum amount that is required to open a fixed deposit account may vary from 1,000 to 10,000. Minimum deposit depends on the banks, so it is important to check before opening an FD account. 

ALSO READ: Fixed Deposit Limit 

Difference Between Fixed Deposit and Term Deposit

How to Invest in a Fixed Deposit on Stable Money App?

Stable Money offers fixed deposits from different Small Finance Banks and NBFCs. Investing in fixed deposit through our platform is simple, just follow the steps below-

• Download the Stable Money app
• You can register with your mobile number
• Now, enter Name and Email ID
• On the home screen, the FD page offers a range of FDs.
• You can compare and choose from these FDs 
• Now, click on the bank in which you want to invest.
• Click on the start investing option
• Enter the amount you want to invest
• Select the tenure
• Next, add Aadhaar and PAN Card details 
• Add a nominee and then review details
• Link withdrawal bank account
• At last complete VKYC- that’s a one-time video verification.
• Once VKYC is complete, make payment and complete the investment

Conclusion

Fixed deposit may be one of the oldest investment options available but are still most trusted due to their simple and reliable features. FDs are still a dependable choice but it depends on choosing the right FD. Compare different FDs before choosing the fixed deposit where you want to make an investment. 

Download Stable Money App to compare and interest rate up to 8% on FD

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