What is Fixed Deposit (FD)?
A fixed deposit is a type of term deposit that is made by the investor for a fixed time period at applicable FD interest rates and generates interest income. FD investment scheme is considered to be one of the safest modes of investment for any investor who has a preferred low-risk appetite. Under FD, an investor invests a lump sum amount and the principal gets locked up for a fixed period of time. On the maturity of a certain time period, the investor gets the principal along with interest income. The time period for FD investment can either be days or can be a number of years. The interest rate on FD depends upon the years invested and is decided by the financial institution accepting FD and even RBI regularises FD interest rates.
The main USP of FD is that the interest rate remains unaffected due to market uncertainty and delivers guaranteed returns. FD investment scheme is an important instrument in India, where the majority of people deposit in FD with the view of safety and low-risk effect on their principal investment.FD delivers around 3% to 7% interest in some cases and provides special interest rates to senior citizens which is one of the reasons why FD is famous among elderly investors.
Geeky Takeaways:
- FD is a type of term deposit that is provided by all scheduled banks, NBFC, and HFC and is regularised by RBI.
- Investment is made for a fixed period of time and the interest rates in FD are constant throughout the invested tenure.
- FD is considered to be the safest form of investment as market volatility doesn’t affect the interest rate and there is no risk of losing the principal amount.
- Senior citizens can avail of special interest rates which are available to them.
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Who Offers Fixed Deposits (FD)?
One of the reason which contributes to the high popularity of FD’s is that they are easy to apply and, are available easily. Fixed deposits are offered by all scheduled commercial banks, NBFCs, HFCs. and, even payments banks like Paytm payment banks and Airtel payment banks offer Fixed Deposit to investors. Private banks can offer better interest rates than public sector banks, but investor should not be attracted to high interest rates without due diligence. It is important for an investor to check the ratings of the financial institution offering FD’s. CRISIL issue ratings for financial institutions which can be used by investor to make a decision whether to invest or not. It is seen that small finance banks are offering better and high interest rates of FD but again investor should pay attention to their ratings.
Features of Fixed Deposits(FD)
Following features are possessed by Fixed deposits:
1. Safe and Secure: Fixed deposits are seen as a safe investment scheme, as there is guaranteed returns in fixed deposit, market uncertainties do not affect the FD returns and they continue to provide constant rate of returns which are risk free.
2. Time Limit: FD have investment time period ranging from 7 days to maximum of 10 years, also investment tenure depends on the issuer of FD.
3. Maturity Proceeds: Under FD, the investor gets his principal along with interest which is compounded annually till the maturity period. Investor are also given the option to re-invest the maturity proceeds again in FD.
4. Premature Withdrawal: Pre-mature withdrawal are allowed in FD, if an investor don’t want to wait till the maturity date. However, the interest applicable on premature withdrawal are lower than the actual interest rate which would have been applicable on maturity. Normally a penalty is levied on premature withdrawal.
5. Taxation: Interest received under FD is chargeable under Income tax under the head other sources. Exemption of ₹40,000 is available and TDS is deducted at the rate of 10%.
How to Invest in Fixed Deposit (FD)?
By Opening an FD Account Offline:
- Visit your nearest bank or the bank in which you already have a saving account along with valid ID proof like PAN card, AADHAR card, voter ID card, etc.
- Ask the bank representatives about opening FD account, and collect FD form.
- Select the investment tenure and also check the applicable interest rates, as interest rates differ as per the investment tenure.
- Deposit the form and bank will check the details and on verification of details and completing KYC, you can chose either to deposit the amount via cash or cheque at time of depositing FD from or you can direct bank to deduct amount from the bank account already available with them.
- On competition of formalities, bank will create a FD and will issue a FD certificate which is to be safely kept will the maturity of tenure.
By Opening an FD Account Online:
- Browse to the web portal or mobile application of the bank partner with which you want to open FD account, now-a-days almost every bank provides the facility of providing FD account opening online.
- Login with your credentials and navigate to “Open FD“
- Select the best FD plan suitable to you
- Proceed to video KYC and fill up the required verification details using TPIN or MPIN
- Your FD will be opened and details shall be communicated on your email and postal address.
(It is important to note that every bank has there own set of online facility and the above steps might differ.)
Benefits of Fixed Deposits (FD)
Apart from the several advantages associated with fixed deposit, the major benefits are as follows:
1. Guaranteed Returns: FD investments provide assured returns and they are very less prone to risk, investor invest in FD as the risk level is low and there is low chance of losing the principal investment. Under FD, on maturity the investor gets principal invested amount along with interest absolutely risk free.
2. Fixed Interest Rates: As there is no affect of external forces on the FD, the interest rates remains unaffected from any volatility throughout the invested period. So there is a sense of relief to investor that they will get the same interest rate at which they subscribed the FD. FD interest rates are better than the normal savings bank account.
3. Loan Facility: Investors get the feature of raising loan against FD, as now-a-days banks have provided the option of loan against FD and it gives an added advantage to investor as FD is highly liquid and a trusted and widely accepted instrument.
4. Low Cost: Another major advantage of FD is that they are extremely cost effective, generally banks do not charge any extra fees specifically related to FD account If investor has an already opened saving or current account. Also, no major maintenance is required in FD investment scheme which attracts investors.
5. Flexibility: There is a high degree of flexibility associated with FD accounts as they allow investor can decide the tenure on his own and also he may decide whether he wants to extend the fixed tenure or not. Also, the option of premature withdrawal is available.
6. Tax Saving: Investments under FD for the tenure of 5 years and above comes under the 80C deduction, which gives investor the advantage of tax savings up to the limit of 1.5 lacs. Any interest income is also exempt up to 40,000 and 50,000 in case of senior citizens.