A fixed deposit or an FD is an investment plan offered by banks and non-banking financial companies (NBFC) to their customers. Through an FD, people can invest a certain sum of money for a fixed period at a predetermined rate of interest in an FD. The rate of interest varies from one to another, although it is usually higher than the interest offered on savings accounts.

How Fixed Deposits Work?

When you invest in an FD, the financial institution guarantees to return the invested sum at the end of the tenure, known as the maturity period, and pays you interest for it. The bank may use this money to lend to other borrowers and charges them an interest for the same. A portion of this interest is passed on to you.

You can choose to reinvest the interest or receive an interest amount periodically in your bank account.

Cumulative FDs pay you the interest and the principal at maturity. The interest is reinvested every year. This means that you will not be eligible to receive regular interest payouts, instead of receiving a lump sum at the end of the FD tenure. The cumulative FD option may be suitable for you if you do not need a regular stream of income.

Non-cumulative FDs will pay you interest at fixed intervals. You could choose to receive interest payments monthly, quarterly, half-yearly, or annually, depending upon your needs. This will give you a regular stream of income.

How Interest on FD Calculated?

Calculating the interest earned on fixed deposits is a function of the amount invested, the rate of interest being offered, and the duration of the investment. The basic formula to calculate interest on your FD is:
Interest on FD = Amount Invested x Interest Rate x (Duration/ 12 months).

Types of Fixed Deposits

Standard Term Deposits: Standard fixed deposits are investment schemes wherein you invest an amount for a fixed period and a predetermined interest rate. The period of investment or tenure can range from 7 days up to 10 years. The interest offered depends on the duration of investment as well as the financial institution offering this instrument.

Senior Citizen Fixed Deposits: For individuals over 60 years of age, banks and NBFCs offer a higher interest rate on FDs than other investors, usually providing about 25-50 basis points (0.25-0.50%) more. They also provide an additional tax benefit. Interest from senior citizen FDs does not carry a tax deducted at source if it does not exceed ?50,000 a year.

Tax-Saving Fixed Deposit: There are specific tax-saving FDs that are eligible for tax deductions. A tax-saving FD has a maturity period of 5 years and the principal amount, up to ?1,50,000 per annum is tax-deductible under section 80C of the Indian Income Tax Act.

Flexi Fixed Deposit: A flexible fixed deposit is linked to your savings account. In this instrument, you can instruct your bank to automatically transfer any sum beyond a predetermined balance to a fixed deposit via an auto sweep-in feature. For instance, if you want to maintain a balance of ?20,000 every month, any excess will be transferred to an FD. Conversely, if your balance falls below ?20,000, the bank will liquidate a portion of your FD to maintain your balance. It gives you the benefit of liquidity and investment.

Fixed Deposit for Non-Resident Indians: Non-resident Indian citizens can invest in non-resident external (NRE) or non-resident ordinary (NRO) fixed deposits. NRE FDs are suitable for citizens earning in a foreign currency. Although there are currency fluctuations, the most significant advantage of NRE FDs is that the whole amount, principal and interest, are tax-free. NRO FDs can be deposited in Indian or foreign currency and are taxable at 30% per annum.

Benefits of FDs

• Assured Return
• Benefits of Compounding
• Low Minimum Investment
• Liquidity & Easy Process
• Higher Rates for Senior Citizens