Fixed Deposit Account: Features, Types, Benefits, and How to Create One?

Fixed deposits (FD) are one of the most sought-after investment alternatives in India on account of their guaranteed returns. Despite an increase in new investment alternatives, FDs are still one of the most preferred investments. With interest rates on the rise, FDs have become more attractive than ever. Read to learn more about fixed deposit accounts and how to create an FD account.

What is a fixed deposit?

A fixed deposit is a savings instrument offered by banks. The main purpose of an FD is to help you save money. In an FD, you can invest a certain sum of money at a predetermined rate of interest for a fixed tenure. The interest is higher than the savings account. At the end of the tenure, you will receive the investment and interest amount in a lump sum.

How does a fixed deposit work?

A fixed deposit account is very different from a current or savings account offered by banks. In a current or savings account, the bank allows you to withdraw money as and when you like. However, in a fixed deposit account, the bank blocks the amount for a fixed tenure chosen by you. It pays an interest against the blocked amount at the end of the tenure. At the end of the tenure, you can either renew the FD or withdraw the amount.

You cannot withdraw the investment amount during the tenure. In case you want to withdraw it, the bank will charge a penalty on the interest before giving you the amount.

Features of Fixed Deposits

Following are the features of fixed deposits -

Investment: the minimum amount of investment for fixed deposits is Rs 1,000 and varies from bank to bank. A fixed deposit allows you to invest only in a lump sum. You cannot make subsequent investments in the same FD. In case you want to invest more in FDs, you must open a new FD account.

Tenure: The tenure of FDs ranges from seven days to ten years. You can choose your tenure based on when you want your money.

Returns: Interest on fixed deposits is compounded quarterly but paid at the time of maturity. The returns are guaranteed, and there is no loss of capital.

Premature withdrawal: Some banks allow premature withdrawal of FDs; however, they will charge a penalty of up to 1% on the interest amount for premature closure.

Renewal: Upon maturity, the FD can either be renewed or withdrawn. Some banks automatically renew the FD, while some don't. If it is not automatically renewed, you must renew it. The renewal process is very simple and easy and can be done online.

Loan against FDs: In case you need money urgently, banks allow you to avail of a loan against your FD and save you from prematurely closing it. The terms of the loan vary from bank to bank.

Types of Fixed Deposits

There are several types of fixed deposits that banks offer. Following are some of the most common types of FDs.

1. Normal fixed deposits: A normal or standard fixed deposit is the one you've read until now. It has predetermined interest and tenure, which will be credited to your account at maturity. The tenure for this FD ranges from seven days to ten years.
2. Tax saving fixed deposits: Tax saving FDs tax saving instruments. Investment in them qualifies for tax deduction up to Rs 1.5 lakhs per annum. They come with a tenure of five years, and no premature withdrawals are allowed on this FD.
3. Cumulative and non-cumulative fixed deposits: Based on the interest payment frequency, fixed deposits are divided into cumulative and non-cumulative. Cumulative FDs compound interest each year but pay it at maturity. Non-cumulative FDs, on the other hand, pay interest monthly, quarterly, half-yearly, or annually, as per your requirement.
4. Flexi fixed deposits: Flexi deposits are similar to normal fixed deposits, but you can invest in them more than once. Here you have to link your savings account with your FD. By doing so, you can transfer the excess funds in your saving account to your FD to earn a higher interest rate.
5. NRI fixed deposits: Fixed deposits for non-resident Indians are NRI FDs. There are two types of NRI FDs, namely NRE and NRO FDs. NRE FD, or Non-resident External FD, is for people who earn in foreign currency but wish to convert it into Indian currency. NRO FD or Non-resident Ordinary is for NRIs who want to manage their Indian income.
6. Senior citizen fixed deposits: Senior citizen fixed deposits are for residents aged more than sixty years old. They are similar to normal fixed deposits in all aspects. They have flexible tenures and similar premature withdrawal rules. But the interest is higher by 0.5%. So senior citizens receive 0.5% higher interest than normal FDs.

How to open a Fixed Deposit Account?

Online process

In earlier days, to open an FD account, it was important that you go to a bank, fill out the application form and submit all the documents. But in the current digitized world, you can open an FD account from the comfort of your home.

Following is the process of opening an FD account online.

• Visit the website of the bank where you want to open an FD account.
• Login to your account or create a new account with them.
• Select the FD option under deposits.
• Fill in all the necessary details such as principal amount, tenure, and nominee details.
• Then, confirm your details and make the payment.

Offline process

Although the online process is quite simple, many prefer going to the bank to invest in FDs, just like the old way. To invest in FDs offline, you must visit the nearest branch of the bank and fill in the application form and submit the documents.

Eligibility criteria for opening an FD account in India

The following people/ firms can open an FD account in India.

• Indian residents
• Senior citizens
• Minors
• Non-resident Indians
• Sole proprietorship
• Partnership firms
• Companies
• Societies and clubs

Documents required for opening an FD account in India

Following are the documents required for opening an FD account in India

1. Passport size photographs
2. PAN card
3. Aadhar Card
4. Other government ID proofs such as driving license, voter ID and passport

Benefits of Fixed Deposit

Guaranteed returns: FDs offer guaranteed returns, and hence they are zero-risk investments. Even if the market is falling, you will get assured returns. The interest is credited to your bank account at the end of the tenure.

Higher return than savings account: FDs offer higher returns than a bank savings account. This is one of the reasons why people are inclined towards saving in FDs than in a bank account. Moreover, the money in the bank account can be used at any time, but you cannot break an FD whenever you want.

Flexible tenure: FDs have flexible tenure options. Banks offer FDs from seven days to ten years, and each tenure has a different interest rate.

Multiple accounts: You can open multiple FD accounts in your name. Every time you want to invest in FD, you can open a new FD account.

Tax benefit: You can claim a tax benefit on your tax-saving FDs qualifies of up to Rs 1.5 lakhs under section 80 C.

Loan against FD: You can take a loan against your FD in case of an emergency. By doing so, you don’t have to break it.

Flexible interest payout: For non-cumulative FDs, you can choose the interest payout as per your requirement. You have monthly, quarterly, half-yearly, or annual options to choose from.

Limitations of Fixed Deposit

Low liquidity: FDs have a fixed lock-in period. This means you cannot withdraw your investment before the maturity period. Hence FDs rate low on liquidity.

Low return: Fixed deposits give lower returns than other marketable securities such as mutual funds, shares, and debt securities. Sometimes, they don't even give inflation-beating returns.

Tax: The interest earned on FDs is taxable. Moreover, the interest is also subject to TDS (tax deducted at source).

Taxation of Fixed Deposit

The interest earned on FDs is taxable as per your income tax slab rate. It is added to the 'income from other sources' category and taxed accordingly. Additionally, the bank also deducts TDS on interest in the year it is credited. The TDS limit is Rs 40,000 for regular citizens and Rs 50,000 for senior citizens.

Frequently Asked Questions

What is the maximum FD limit?

The maximum amount of investment in FDs differs from bank to bank. Most banks accept investments up to Rs 2 crores.

Is five-year FD tax-free for five years?

No, the FD amount is tax-free only in the year of investment. If you want to claim tax benefits for five years, then you must invest every year.

What is the risk of a fixed deposit?

FDs are subject to interest rate risk. In case the interest rates go up, there is a risk of your money being blocked for a lower rate of interest.

Is interest on Fixed Deposit taxable?

Yes. Interest from Fixed Deposits is taxable and is considered as an 'income from other sources'.

Can I invest Rs.10 lakh in Fixed Deposit?

Yes, you can invest 10 lakh rupees in fixed deposit. Check the information on bank's return for the said amount before investing.

What is the maximum and minimum tenure for which I have to invest in Fixed Deposit?

You can invest your money in Fixed Deposits for a period of 7 days to 10 years. You can also check with the bank/ institution what is the rate of interest for the period of time you are investing the money.