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Fixed Deposit or FD is an investment option given by banks and non-banking financial companies (NBFCs). It is one of the easiest ways to earn interest on your money. You can deposit a large amount with the bank or NBFC and earn a regular income in the form of interest, which is higher than savings account interests and carry no market-related risks.
For building your savings for short-term goals, a savings account can be the most preferred option. When you have surplus cash, depositing this in your savings account will fetch you interest. This interest is taxable.
Features of Fixed Deposits
It is available in several tenures
Guaranteed Returns
Loan against your FD
Regular income through interest with options on its frequency like monthly, quarterly, and annual.
Option to reinvest the interest and get compound interest in the case of cumulative deposit
Withdrawal option (partial or full) available with a penalty
NBFCs provide higher interest rates for fixed deposit than banks
Easily renewable with additional benefits on renewal
Tax is deducted at source from the interest on fixed deposit
Types of Fixed Deposits
Cumulative Deposits
- You get your principal and interest on the maturity date. The interest payment stays in the deposit, and interest is paid on it as well. This is called compounding, and the frequency at which compounding is done varies from bank to bank.
- Cumulative deposits are suitable when you don’t depend on the periodic interest income for expenses. All FD interest is taxable.
Non-cumulative fixed deposits
- Non-cumulative FDs are suitable if you are looking for a regular income, such as retired people. They can invest a lump sum in a non-cumulative FD and earn regular returns with options of receiving interest monthly, quarterly, half-yearly or annually. All FD interest is taxable.
Tax-saving fixed deposits
- You can combine low risk and tax savings with the tax-saving FD, which has a five-year lock-in and cannot be pre-closed.
- The amount you place in these deposits is eligible for tax deduction under Section 80C of the Income-tax Act, 1961.
- Though there is no option to pre-close the deposit, you can choose a nominee at the time of application, and the nominee can claim the principal and accrued interest after your death.
Why invest in Fixed Deposits?
The money investment is 100% safe. A deposit amount up to Rs 5 lakh per depositor across banks is insured with the Deposit Insurance and Credit Guarantee Corporation (DICGC).
When you need a loan, you can rely on your FD for a loan instead of taking a high-interest personal loan. You can borrow up to 90 per cent of the FD principal.
The interest rate for deposits will not change and will remain the same throughout the term
People can avail credit cards against fixed deposits at the discretion of the bank. The spending limit on the credit card depends on the FD amount.
FD is much affordable for the common man as most Indian banks allow FDs from Rs 1,000.
With the tenure and interest rate fixed throughout the process, it is easy to calculate the estimated return. As the interest rate is fixed when it comes to fixed deposits, you should get your expected returns.
Depositors can pre-close FDs before maturity by paying the penalty.
Fixed Deposit is one of the safest investment options and gives stability to your savings.
Limitations of Fixed Deposits
Premature withdrawal fine– In case a depositor wants to claim the amount deposited before the end of the FD tenure, then he ought to pay a premature withdrawal fine amount to complete the process.
Lock-in period – Be it any sum that you have deposited, the amount is locked in for a specific period of time. The amount can’t be claimed during this time period in case of emergencies.
Tax benefits – Until and Unless a depositor chooses tax-saving fixed deposits, the individual cannot claim for tax exemption.
Fixed interest rates – Interest rates do not rise or fall with time. The income is fixed, and the expectation for higher returns is not practical.
Taxability on fixed deposits
- The interest claimed as a return is taxable.
- The tax deducted can be from 0% to 30% depending on the income tax bracket they fall in. When the interest amount is more than Rs. 10000 every year, then the TDS deducted is 7.5%.
- The deduction is applicable only if the PAN details are given. TDS deduction is 20% if the PAN number is not attached.
- The TDS deduction can be claimed back if the total income is less than the 10% income slab.
- To avoid deductions, the depositor has to submit the Form 15G to the bank. If the depositor is a senior citizen, Form 15H has to be submitted.
- When the investor is in a higher tax bracket, 20% to 30%, there is an extra tax amount to be paid.
Things to know before selecting a Fixed Deposit
- Every bank has a different minimum and maximum deposit limit, which you must check as well
- Type of interest (fixed or floating rate)
- Withdrawal options
- Mode of payout.
- Most banks offer fixed deposits for periods between one year to ten years. Choose the tenure based on your requirement
Documents required to open a fixed deposit
Identity proofs
- Aadhar Card
- Voter ID card
- Driving license
- Passport
- PAN Card
Address proofs
- Bank statement with cancelled cheque
- EB Bill
- Telephone bills
How to open a fixed deposit online?
Fincover allows you compare the different fixed deposit options in the market. To open a fixed deposit online in Fincover follow these steps,
- Login to Fincover and click on “Banking Products” and then “Fixed Deposits”
- Fill in the fixed deposit form. The details required include investor name, date of birth, city, email and phone number
- After submitting the details, you will view the best FD plans available in the market. Compare and choose the plan that suits your requirement
- You will be redirected to the bank or NBFC’s website to complete the procedure
