How Fixed Deposits (FDs) Work: A Complete Guide to Understanding Your Investment

Fixed Deposits (FDs) are a popular savings tool in India. They provide a secure way to save money and earn interest. Understanding how FDs work can help you make informed decisions about your investments.

What is a Fixed Deposit and How Does it Work?

A Fixed Deposit (FD) is a financial instrument offered by banks and NBFCs. You deposit a lump sum of money for a fixed tenor. In return, you earn interest on the amount. The interest rate is predetermined and remains constant throughout the tenor. At the end of the tenor, you receive the principal amount along with the accrued interest.

Key Features:

• Principal Amount : The sum of money you deposit.

• Tenor : The duration for which the money is deposited.

• Interest Rate : The percentage at which your deposit grows annually (p.a.).

When you open an FD, the bank/NBFC issues a certificate of deposit. This document confirms the details of your investment. It includes the principal amount, tenor, and interest rate. FDs offer the benefit of capital protection. The deposited amount is safe and does not fluctuate with market conditions. This makes FDs an attractive option for conservative investors looking for steady returns.

Benefits of a Fixed Deposit

• Safety : FDs are low-risk investments. They are less affected by market fluctuations.

• Fixed Returns : The interest rate is fixed and guaranteed.

• Flexibility : You can choose tenors ranging from a few days to several years.

• Tax Benefits : Certain FDs, like tax-saving FDs, offer tax saving options under Section 80C of the Income Tax Act, 1961.

• Liquidity : While FDs have a fixed tenor, many institutions allow premature withdrawals. Though there might be a penalty, it provides liquidity in case of emergencies.

Higher Interest Rates for Senior Citizens

Most banks and NBFCs offer a higher interest rate for senior citizens. This makes FDs a preferred investment option for retirees.

FDs also offer the benefit of compounding. If you choose the cumulative option, the interest earned is added to the principal amount. You then earn interest on the new total in the next period. This compounding effect can significantly increase your returns over time.

Types of Fixed Deposits

Regular FD : Offers fixed interest for a specified tenor.

Tax-Saving FD : Provides tax benefits under Section 80C. Has a lock-in period of 5 years.

Senior Citizen FD : Offers higher interest rates for individuals above 60 years.

Flexi FD : Linked to your savings account. Allows partial withdrawal without breaking the FD.

Cumulative FD : Interest is compounded quarterly or annually and paid at maturity.

Non-Cumulative FD : Interest is paid out monthly, quarterly, or annually, providing a regular income stream.

How to Open a Fixed Deposit

Opening an FD is straightforward. Follow these steps:

1. Choose a Bank/NBFC : Compare interest rates and choose a financial institution.

2. Select Tenor and Amount : Decide the tenor and the amount you wish to deposit.

3. Submit Application : Fill out the FD application form online or at the branch.

4. Provide Documents : Submit necessary documents for verification.

5. Deposit Funds : Transfer the funds to the bank/NBFC.

When choosing a bank or NBFC, consider the interest rates offered. Also, evaluate the customer service and the institution's credibility. Using tools like the Yes Bank FD calculator can help you estimate your returns. It allows you to compare different tenors and interest rates.

Eligibility Criteria for a Fixed Deposit

Individual : Any individual above 18 years can open an FD.

Joint Account : FDs can be opened jointly.

Minors : Can open an FD with a guardian.

HUFs : Hindu Undivided Families can open FDs.

NRIs : Non-Resident Indians can also invest in FDs.

Each bank or NBFC may have specific eligibility criteria. It is advisable to check with the institution before applying. Some institutions might also offer special FDs tailored to specific groups, such as women or senior citizens. These FDs come with added benefits or higher interest rates.

Documents Required for a Fixed Deposit

Identity Proof : Passport, Aadhaar, PAN card, or voter ID.

Address Proof : Utility bill, passport, or Aadhaar.

Photographs : Recent passport-sized photographs.

PAN Card : For tax purposes.

Ensure that the documents are up to date and valid. Some banks/NBFCs might also require additional documents. These could include proof of income or a copy of your bank statement.

What is a Loan Against FD?

A loan against FD is a facility where you can borrow money by pledging your FD as collateral. This is helpful if you need funds without breaking your FD. The loan amount can be up to 90% of the FD value. The interest rate is usually 1-2% higher than the FD rate.

Advantages:

Quick Processing

Loans against FDs are processed quickly since they are secured loans.

Lower Interest Rates

Compared to personal loans, loans against FDs have lower interest rates.

No Credit Check

Your credit score does not impact the approval of the loan since it is secured against your FD.

Repaying the loan does not affect the interest earned on your FD. This approach is cost-effective for meeting urgent financial needs. It allows you to do so without liquidating your savings.

Tax Liability

Interest earned on FDs is taxable. The bank/NBFC deducts Tax Deducted at Source (TDS) if the interest exceeds ?40,000 in a financial year. For senior citizens, the limit is ?50,000. You must declare the interest income in your annual tax return and pay taxes accordingly.

Key Points:

Form 15G/15H

If your total income is below the taxable slab, submit Form 15G if you are below 60 years. If you are 60 years and above, submit Form 15H to avoid TDS deduction.

Tax-Saving FDs

Interest earned on tax-saving FDs is taxable. The principal amount is eligible for deduction under Section 80C of the Income Tax Act, 1961.

Conclusion

Fixed Deposits (FDs) are secure and reliable savings tools. They offer fixed returns, safety, and flexibility. FDs are suitable for both beginners and stable investors. They cater to short-term and long-term needs. Use tools like the Yes Bank FD calculator to maximise your returns. This can help you achieve your financial goals. Consider tax implications and options like loans against FDs to enhance benefits. With the right approach, FDs can be a key part of your financial planning. They provide both security and steady growth.