What is an FD

Indians have always considered fixed deposits as the most secure form of investment. You must have heard countless stories of Indian parents urging their kids to set aside a percentage of their income for fixed deposit plans. There is a reason behind Indians trusting their money with FDs - they are time-tested and provide consistent returns.

There are many salient features associated with fixed deposits. In this article, let’s understand this investment mode better.

What exactly is a Fixed Deposit?

Fixed Deposits are financial instruments provided by Banks or NBFCs. They generally give a higher interest rate than a savings bank account. The instrument comes with a fixed maturity date. The tenure can be as low as seven days to as high as ten years.

The underlying feature of an FD is that you cannot withdraw money from it, as you could do from a recurring deposit. Although, if the investor needs funds, there are options available. You could opt for a decent loan against your fixed deposit certificates, or the premature withdrawal facility is also provided.

Salient Features of a Fixed Deposit

Below are some of the salient features of a fixed deposit:

• Fixed tenure with predetermined period.
• Fixed interest rate for guaranteed returns.
• Interest payment options (regular/compounded).
• Minimum investment amount required.
• FDs considered a safe investment.
• No market fluctuations involved.
• TDS on interest income may apply.
• Option for auto-renewal upon maturity.
• Loan facility available against FDs.
• Senior citizen benefits with higher rates.‍

What are the Benefits of a Fixed Deposit?

1. Loans

You can avail up to 80-90% value of the deposit as a loan. The interest rate is usually 1 to 2% higher than what the customer earns for his fixed deposit. The loan facility comes in very handy when a depositor urgently requires funds.

2. Higher Rate of Interest

Fixed Deposits earn interest at a higher rate than the banks offer for conventional savings bank accounts.

3. Tax Saving

Specific fixed deposit categories allow you to save tax under 80C of the Income Tax Act.

4. Cumulative FDs

Depositors can choose to get their interest regularly; in most cases, it is paid quarterly. There is also an option for the user to reinvest the interest and collect the entire payment cumulatively at maturity.

5. Auto-renewal

Auto-renewal is a facility provided by most banks that allow for any fixed deposit which has matured to be renewed automatically.

6. Safe and Guaranteed Returns

Unlike investments in stocks, mutual funds or debt instruments, fixed deposits are the most secure and generate guaranteed returns per the applicable interest rate.

7. Helps you Develop a Saving Habit

Due to the inherent feature of a lock-in period, a fixed deposit deters a person from easy withdrawals. Hence, creating a much-needed surplus to meet any financial requirements in the long run.

8. Better Rates for Senior Citizens

Almost all banks provide a higher percentage of interest rates for senior citizens.

9. Premature Withdrawals

In a worst-case scenario, if the depositor urgently needs funds, there is a provision to withdraw the amount before the maturity of the term deposit. Hence, the investor stays financially protected at all times.

Disadvantages of fixed deposits

1. Low Liquidity

Due to the very nature of such instruments to be fixed for a certain period, they result in low liquidity. Withdrawal before maturity leads to lower interest and penalty charges.

2. Tax on Interest

The interest earned from fixed deposits is taxed as per your IT slabs. Interest above rupees 40,000 per annum (₹50,000 for senior citizens) attracts 10% TDS. Form 15G or 15H must be submitted in cases where such TDS is not applicable.

3. Interest Rates can be Lower than Inflation

Since fixed deposits are very safe instruments, the interest earned can pale in comparison to the returns given by other new-age financial

tools.

4. No Increase in Interest Rates

A plan selected for a specific tenure will continue to offer the same interest rate throughout its term. There are no changes in this rate applicable. As the interest rate remains unchanged, it could be lower than the prevailing market rate.

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Frequently Asked Questions

1. How does an FD work?

FD is a savings scheme where you deposit a fixed amount for a set period at a predetermined interest rate. You get back the deposited amount plus interest when the FD matures.

2. Is it good to invest in FD?

Investing in FD can be a good choice for stable and low-risk returns, but it may offer lower returns compared to other investment options.

3. Is FD paid monthly?

No, FDs are typically not paid monthly. The interest on FDs is usually paid out at the end of the tenure or periodically, such as quarterly, half-yearly, or annually.

4. What is the tax on the earned FD interest?

As of the financial year 2019-20, if the total interest income earned by the depositor exceeds ₹40,000 annually (₹50,000 in the case of senior citizens), TDS at the rate of 10% is deducted by the bank. If the depositor does not provide a case, PAN, 20% TDS is deducted immediately. However, Income Tax rules prescribe that if an investor has an annual income of less than ₹2.5 lakhs, then even if the interest income exceeds ₹40,000 but is less than ₹2.5 lakhs, TDS is not to be deducted. But to avail of these tax benefits, the investor must submit form 15G or form 15H, as applicable, to the bank well in advance.

5. What are the penalties for pre-closure?

For example, if the investor has a term deposit for three years at a 5% interest rate, and if the deposit is broken only after one year, in such cases, the bank will calculate interest in a shorter time frame. So if the interest payable for one year is only 4%, instead of the pre-assigned 5%, then only the bank would pay much interest to the depositor.

6. Are there any alternatives to fixed deposits?

There are alternatives to fixed deposits that can be a more innovative option with better features. Fi has a Smart Deposit , which has the following advantages: A higher interest rate, a 'Swipe to add’ feature that allows any amount between ₹1 to Fifty thousand to be added, the account can be closed anytime, and the users can withdraw the money, and the total amount is insured for up to ₹5 lakhs.