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Safety is one of the first things you look for in an investment. Based on the amount of risk that investors are willing to take, they are divided into three types

  • Aggressive investors

  • Moderate Investors

  • Conservative Investors

There are a variety of investment options available to investors. All three types of investors have Fixed Deposits in their investment portfolio. This is because Fixed Deposits are one of the safest investments options. They are less risky compared to many other investments and give guaranteed returns.

What is a fixed deposit?

The term "fixed" in Fixed Deposits denotes the period of maturity or tenure. Fixed Deposits are also known as Term Deposits and FDs. In a Fixed Deposit, money is deposited in the bank for a specified period of time earning a fixed rate of interest. The bank pays interest on the money deposited with them.

In case of an emergency, you can make a premature withdrawal or break your Fixed Deposit by paying a penalty. The depositor will be given 1% less interest on withdrawal.

Advantages of Fixed Deposits

  • Fixed Deposits offer fixed and guaranteed returns.

  • FDs are liquid investments. You can withdraw whenever you need cash, just by paying a penalty.

  • Fixed deposits are flexible in nature. You can opt for an FD whose maturity can range from 1 month to 1 year to even 10 years.

  • You can invest small amounts in an FD.

  • It is easy to raise a loan against an FD. You can borrow up to 90% of the FDs amount, just by pledging the FD.

Disadvantages of Fixed Deposits

  • Returns are lower than many other investment options.

  • FD interest is not sufficient to cover rising inflation.

  • If borrowers invest all their savings in FDs, they may not enjoy the benefits of portfolio diversification like investments in shares, Mutual Funds and real estate.

  • TDS is deducted on interest income.

  • Premature withdrawal results in loss of interest income in the form of a penalty.

Loan against Fixed Deposit

A loan taken against a Fixed Deposit is a secured loan. The Fixed Deposit is the Collateral. This makes the Loan against Fixed Deposit, cheaper than a Personal Loan. Personal Loan is an unsecured loan.

The loan that can be availed against a Fixed Deposit, varies from bank to bank. It also depends on the size of the Fixed Deposit. Higher the value of the Fixed Deposit, the higher the amount of loan you can avail. Usually, a loan against Fixed Deposit can be availed up to an extent of 80-90% of its value.

A Fixed Deposit has a maximum tenure of 10 years. As a result, the loan repayments have to be adjusted within this tenure. The loan must be repaid before the maturity of the Fixed Deposit.

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Why invest in Fixed Deposits

Your Investment is Safe

The money invested is safe, and you earn interest on the deposit.

         

The Savings Habit

Investing in a Fixed Deposit inculcates the saving habit.

         

Helps get a Loan

You can pledge the FD as collateral and avail loans at a lower interest rate.

         

Tax Benefits

Investment in a 5-year tax saver Fixed Deposit is eligible for a tax deduction under Section 80C, up to Rs 1.5 Lakhs a year.

Eligibility for Fixed Deposits

The customer should be a Resident of India. Even a minor or a HUF can invest in FDs.

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Types of Fixed Deposits

Regular Fixed Deposit

In this FD, the customer deposits money with a bank for a fixed time period called tenure of the Fixed Deposit. The rate of interest applicable is higher than a savings bank account.

5-year Tax Saver Fixed Deposit

You get to enjoy a tax deduction of Rs 1.5 Lakhs per year under Section 80C of the Income Tax Act on an investment in the 5-year tax saver FD.

A minimum deposit of Rs 10,000 must be made. No savings bank account is needed to open an FD.

Senior Citizens FD

Senior Citizens FD is specially designed for people above the age of 60 years. They earn an additional interest rate of around 0.5%.

Flexi Fixed Deposit facility

A Flexi Fixed Deposit facility allows a depositor in the FD to transfer money from savings bank or current account, with which the FD is linked, to the FD and vice versa. It is also known as Sweep in-Sweep out facility or auto sweep facility.

A depositor can instruct the bank to transfer any excess amount from the Savings Banks account to an FD, for tenure of 1 year. This transferred amount earns a higher rate of return compared to a Savings Bank Account. Most Savings Bank Accounts offer 3.5% interest a year.

If there is insufficient balance in a savings bank account or current account, as per the depositor’s instructions, funds will be swept from the fixed deposit into that account.

You can make a withdrawal from these Fixed Deposits for any emergencies, without affecting your savings or even breaking the deposit. Interest will only be lost on the amount that’s swept and not on the full deposit.

How to Apply

You need to deposit a minimum amount of INR 10,000. You don't need to have a savings bank account. If you have one, it does have some benefits.
You require proof of identity and address: passport/ driving license/ voter's identity card/ PAN card/ ration card/ recent utility bills/ credit card bill. This is necessary for the KYC (Know Your Customer), procedure. You might require a letter of introduction to open a fixed deposit.

 

Concepts & FAQ's Fixed Deposit

What is a Fixed Deposit?

"Fixed Deposits" are considered to be the safest form of investment or savings that provides returns consistently at a fixed rate. The term "fixed" in Fixed Deposits denotes the period of maturity or tenure. Fixed Deposits are also known as Term Deposits. In a Fixed Deposit Account, a certain sum of money is deposited in the bank for a specified time period with a fixed rate of interest.

Rate of interest differs from bank to bank. Normally, the rate is highest for deposits for 3-5 years. Every Banks offer fixed deposits schemes with a wide range of tenures for periods from 7 days to 10 years. Therefore, the depositors are supposed to continue such Fixed Deposits for the duration of time for which the depositor decides to keep the money with the bank. However, in case of need, the depositor can ask for closing the fixed deposit in advance by paying a penalty.

Banks have even introduced variable interest fixed deposits. The rate of interest in such deposits will keep on varying with the prevalent market rates i.e. it will go up if market interest rate goes and it will come down if the market rates fall.

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Features of Fixed Deposits

  • Banks offer Fixed Deposits with tenure ranging from 7 days to 10 years

  • The rate of interest on FDs varies from bank to bank. Interest is higher for long-term deposits

  • Banks have also introduced variable interest Fixed Deposits. The rate of interest on such deposits varies with market rates.

  • The tenure and interest of FDs are fixed. Therefore, the depositor knows the maturity amount of the FD, at the time of making the deposit.

  • Though the interest is compounded quarterly, it is only given on maturity.

  • RBI has permitted banks to quote a higher rate of interest for individual deposits which are more than Rs 15 Lakhs.

  • Banks allow you to avail loans against FD.

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Frequently Asked Questions

Will I get a FD receipt?

Yes, you will get FD receipt. But, you will not be issued a receipt for FD opened through Internet Banking.

Can I redeem my FD before the original term?

Yes, FD can be closed before the original term of the FD. In the event of the Fixed Deposit being closed before completing the original term of the deposit, interest will be paid at the rate applicable on the date of deposit, for the period for which the deposit has remained with the bank. In case of premature withdrawal the deposit may be subject to penal rate of interest as prescribed by the Bank on the date of deposit.

Can I obtain a loan from the bank on the security of my FD?

Yes, Loan facility is available up -to 90% of principal and accrued interest.

Is there any auto renewal facility available on FDs?

Yes, you can opt for auto renewal at the time of opening the FD or anytime before the FD matures. Auto renewal allows your FD to get renewed automatically for the same period as the original deposit. However under auto renewal option the fixed deposit receipt is with the custody of the Bank and Memorandum of Deposit (MOD) is issued in lieu of fixed deposit receipt.

How do I redeem my FD?

After maturity of your FD, you can walk into the bank branches across the country and claim your deposit by furnishing your Fixed Deposit receipt/Memorandum of Deposit.

At what frequency will I receive interest on my FD?

For the Traditional scheme, the interest on the Fixed Deposit (FD) account is credited to the Savings account specified by you on a monthly basis or on a quarterly basis. For the reinvestment scheme, the interest is compounded to the principal amount on a quarterly basis.

Is TDS applicable on FDs?

Tax is deducted at source, from the interest on Fixed Deposits, as applicable, as per the Income Tax Act, 1961.

At what rate is TDS deducted?

TDS on fixed deposits is deducted at the following rates for the following category of account holders: Type of Account Holders - TDS (%)

  • Resident Individuals, Sole Proprietorship, Trusts, Association of Persons, Hindu Undivided Family (HUF) - 10.2%

  • Domestic Companies- 20.4%

  • NRO Deposits - 30.6% Confused? What tax rates are applicable, Call us on 080 67974000 and learn from us!

What are nomination facilities available on FDs?

The facility of Nomination is available for relationships in the names of individuals. Unless otherwise specifically given in writing by depositors, nomination in deposit accounts will be at Customer ID level.

What is the maximum deposit amount insured by the DICGC?

Each depositor in a bank is insured Upto a maximum of Rs.1, 00,000 (Rupees One Lakh) for both principal and interest amount held by him.

What are the Benefits of Fixed Deposits?

  • There is a potential to earn compound interest by reinvesting the principal amount along with the interest earned during the period.

  • Flexibility in altering period of deposit, maturity and payment instructions, principal amount.

  • Higher rate of interest on fixed deposits for senior citizens.

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The union government has planned to increase the deposit insurance limit to Rs.5 lakh from the existing Rs.1 lakh. The move will make banks obligated to pay Rs.5 lakh to its depositors in case of failure, according to the source. The government is likely to roll out the framework under a new law and has planned to set up a Resolution Authority.
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SBI cuts long-term FD interest rates by 15 bps

Tuesday, January 14, 2020, 2:58 PM

The country's largest lender, the State Bank of India(SBI), has reduced interest rates on fixed deposits(FDs) for certain tenures by 15 basis points (bps) ( 1 bps = 100 percentage points). The new rates came into effect from January 10, 2020 and for those FDs below Rs.2 crore. The bank has cut rates on long-term fixed deposits maturing in 1 year to 10 years.
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RBI unions want govt to hike deposit insurance cover to Rs 10 lakh

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The Reserve Bank employees unions on Tuesday urged the government to hike the insurance cover on bank deposits from the present Rs 1 lakh to Rs 10 lakh. The demand for increasing bank deposit insurance cover, which was last revised in May 1993, has come to the fore after the ongoing crisis at Punjab & Maharashtra Cooperative Bank.
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What is a Term Deposit?

Saturday, January 19, 2019, 6:33 PM

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Wednesday, April 11, 2018, 7:13 AM

If you are looking at safety and security for your child, you can go for a combination of high-quality company FDs, and bank FDs. For example, there is the KTDFC Company FD, which is offering an interest rate of 8.25%, against banks which are offering a rate of just 6 to 6.5%. Another is Deutsche Bank, which offers an interest rate of 7.75% per annum.
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Thursday, November 30, 2017, 6:48 AM

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