Fixed Deposits
A fixed deposit, commonly referred to as an FD, is an investment scheme provided by banks and non-banking financial companies. Unlike regular savings accounts, FDs offer higher returns on the invested principal amount.
The term "fixed deposit" stems from its characteristic of having a predetermined tenure. Depending on an individual's investment strategy, the FD tenure can range from short to long term. Interest rates on fixed deposits vary across different banks and financial institutions.
It's important for fixed deposit investors to understand that premature withdrawal of funds can incur financial penalties. However, in cases of emergencies, early withdrawal is possible, albeit with associated costs.
Various entities offer fixed deposit options, including banks, post offices, and non-banking financial companies. In India, investors have numerous choices for opening fixed deposit accounts. Prior to depositing funds, it's advisable to compare interest rates, the reputation of the institution, and other relevant factors.
To open a fixed deposit account, individuals can approach any bank or NBFC in the country. Additionally, those without bank accounts can opt for fixed deposit investments through post office accounts.
Various types of fixed deposit options are available for investors to consider before making their investment decisions. Familiarity with these options is essential to ensure that the chosen plan aligns with their investment objectives.
Here are some common types of fixed deposit schemes open to prospective investors:
Corporate Fixed Deposit:
These are fixed deposit schemes offered by companies, excluding banks. Referred to as company FDs, investing in such instruments can potentially yield higher returns in certain cases.
Standard Fixed Deposit:
Standard plans represent basic investment schemes where investors deposit a fixed amount with a financial institution. Upon maturity of the fixed tenure, investors become eligible to receive their principal amount along with the accrued interest from the deposit.
Senior Citizen Fixed Deposit:
Individuals aged over 60 years can also invest in fixed deposit instruments. However, most plans tailored for this age group offer flexible tenure options. Additionally, senior citizen investors enjoy higher interest rates on their investments compared to standard schemes.
Tax Saving Fixed Deposit:
Investors seeking tax-saving opportunities can utilize tax-saving FDs. However, the maximum deposit for such plans is limited to Rs. 1.5 lakh per year, and the lock-in period is typically 5 years.
Cumulative Fixed Deposit:
These fixed deposit schemes compound interest quarterly, half-yearly, or yearly. However, the total interest earnings are paid out upon maturity, allowing investors to significantly grow their corpus over time.
Non-Cumulative Fixed Deposit:
Interest earnings from fixed deposits are disbursed monthly, quarterly, or half-yearly in this type of scheme. It's suitable for investors seeking a regular income source, particularly beneficial for pensioners.
Flexi Fixed Deposit Plans:
With Flexi FDs, the deposit can move between a savings account and an FD account. To initiate an investment using Flexi FDs, investors must link the fixed deposit account with their savings account. This category of FD plans offers high-interest rates along with liquidity.
NRO Fixed Deposit Account:
Non-resident Indians can deposit their India-generated earnings in an NRO FD account. NRO account holders can repatriate the interest earned entirely, while the principal amount has repatriation limits.
NRE Fixed Deposit Account:
NRIs can remit their overseas-generated income and invest in an NRE fixed deposit account. Both the interest and principal amounts are repatriable in this case.
Fixed Deposit - Interest Rates
The prevailing rates for fixed deposits (FDs) are not standardized, as they vary depending on the financial institution offering the investment option. Each bank or non-banking financial company (NBFC) sets its own interest rates for deposits.
Furthermore, the rate of return can also be influenced by the age of the investor. Senior citizens typically receive higher returns compared to those below 60 years of age.
Interest rates are subject to fluctuation based on factors such as the duration of the FD, the specific financial institution, and the type of FD account or plan. However, investors can generally anticipate better returns from FDs compared to savings accounts.
Eligibility Criteria for Fixed Deposit Investment:
The following categories of individuals and entities are eligible to open a fixed deposit account in India:
- Indian residents
- Non-Resident Indians (NRIs)
- Individuals or joint investors (two or more individuals)
- Senior citizens
- Minors
- Sole proprietorships
- Societies or clubs
- Companies
- Partnership firms
Necessary Documents for Fixed Deposit Investment:
To successfully invest in FD schemes, investors are required to submit specific documents regarding their identity and residential address:
Identity proof:
- Passport
- Voter ID card
- PAN card
- Aadhaar card
- Driving license
Address proof:
- Electricity bill
- Telephone bill
Senior citizens and minor investors must also provide age proof documents, such as a matriculation certificate or birth certificate.
Lock-in Period for Fixed Deposit:
The lock-in period for a fixed deposit, also known as the maturity period, is the duration during which investors cannot withdraw their deposits without incurring financial penalties. For tax-saving FDs, early withdrawal before the lock-in period ends is strictly prohibited.
While premature withdrawal is possible for other types of FDs, it typically results in penalties. The specific penalty terms may vary depending on the investment plan.
It is advisable for investors to keep their deposits intact until maturity to maximize returns. Upon maturity, investors receive substantial returns, and early withdrawal may result in loss of interest earnings from the FD.
Reasons for Investors to Consider FDs for Their Portfolio:
Investors may face risks when investing in market-linked instruments in pursuit of higher returns. Therefore, to ensure a balanced financial growth strategy, it is important for investors to consider safer investment options as well.
Fixed deposits offer safety and guarantee returns, contrasting with riskier investment instruments. Consequently, even if investors experience losses in other investment avenues, they can recover a portion of their losses through FD investments.
What is loan against FD?
A loan against FD allows fixed deposit investors to borrow funds against their fixed deposit investment. The maximum loan amount can vary depending on the bank and the terms of the FD. Typically, the loan quantum is offered up to a certain percentage of the fixed deposit amount.
The interest rate for these loans is generally lower compared to unsecured credits. However, it's crucial for investors availing such loans to carefully review and compare the interest rates offered by different lenders.
The repayment tenure for the loan is typically limited to the maturity period of the fixed deposit against which the loan is taken.
Who Should Consider Investing in Fixed Deposits?
Fixed deposits are suitable for several types of investors, particularly:
- Inexperienced Investors: Fixed deposits are ideal for those who are new to investing and prefer a simple and low-risk option.
- Risk-Averse Individuals: Investors who prioritize capital preservation and seek assured returns with minimal risk can benefit from fixed deposit schemes.
However, it's important to note that while fixed deposits offer guaranteed returns, the rate of return is typically lower compared to higher-risk investment options.
Taxation on Fixed Deposit Earnings:
Interest earned on fixed deposits is subject to taxation, and Tax Deducted at Source (TDS) is applicable as per the Income Tax Act. The interest earnings are added to the individual's Income Tax Returns under the category of "Income from Other Sources."
TDS is deducted if the total interest earnings from all sources exceed Rs. 40,000 in a financial year. For amounts below Rs. 40,000, individuals need to submit Form 15G/H to declare this to financial institutions. Even if interest earnings surpass Rs. 40,000, individuals can choose to submit Form 15G/H, but they must ensure all tax liabilities are settled.
In the case of tax-saving fixed deposits, individuals can claim tax exemption of up to Rs. 1.5 lakh in a financial year on the principal amount invested.
