The Basics of Fixed Deposits (FD)

On February 16, 2025 By newsroom Topic: India Money Advice

A Fixed Deposit (FD), also known as a term deposit or time deposit, is a low-risk financial instrument offered by banks, post offices, or NBFCs (Non-Banking Financial Companies). It allows you to earn a fixed interest rate on your investment for a specific tenure, providing security and stable returns. Here's a breakdown:

Key Features of Fixed Deposits

Definition:
A secure investment option offering fixed returns over a predefined period.
Ideal for conservative investors seeking assured growth.
Safety:
Deposits up to ?5,00,000 are insured under the DICGC (Deposit Insurance and Credit Guarantee Corporation).
NBFC deposits do not have DICGC insurance but are evaluated based on credit ratings.
Interest Rates:
Typically range from 2.25% to 6.80% depending on tenure and financial institution.
Tenure:
Flexible options from 7 days to 10 years.
Loan Against FD:
Loan facility available up to 90% of FD value at slightly higher interest rates.
Penalty for Premature Withdrawal:
Reduction in interest rate or direct penalties may apply.

Types of Fixed Deposits

Regular FD:
Flexible tenures (7 days to 10 years).
Interest can be cumulative (paid at maturity) or non-cumulative (paid monthly, quarterly, or yearly).
Tax-Saving FD:
Offers tax deductions under Section 80C (up to1.50 lakh).
5-year lock-in period with a lump sum deposit.
Senior Citizens FD:
Higher interest rates for individuals aged 60+.
Flexi FD:
Combines savings account and FD features with auto-sweep functionality.

Eligibility Criteria for Fixed Deposits

Individual depositors aged 18+ with a PAN card.
Hindu Undivided Families (HUFs).
Minors under a guardian.
Must meet KYC requirements with valid ID, address, and signature proofs.

Advantages of FD Investments

Risk-Free: Guaranteed returns.
Flexible Tenures: Ranges from short-term to long-term.
Tax Benefits: Tax-saving FDs provide deductions under Section 80C.
Liquidity: Can be prematurely withdrawn in emergencies (with penalties).

FD Tax Implications

Tax on Interest:
Interest is taxable as per your income tax slab.
TDS is deducted if interest exceeds40,000/year (?50,000 for senior citizens).
Tax-Saving FD:
Eligible for ?1.50 lakh tax deduction under Section 80C.
Interest earned is still taxable.

Comparing FD Options

| Features | Bank FD | NBFC FD | Corporate FD |
|-------------------------|--------------------------|------------------------|------------------------|
| Safety | High | Moderate | Moderate |
| Credit Rating | Not Required | Mandatory | Mandatory |
| Interest Rates | Moderate | Higher | Higher |
| Tenure | 7 Days to 10 Years | 1–5 Years | 1–5 Years |
| DICGC Insurance | Yes (up to5,00,000) | No | No |

Frequently Asked Questions (FAQs)

Can I withdraw money before FD maturity?
Yes, but premature withdrawal may incur penalties or reduced interest.
What happens if I break an FD early?
You may lose some interest, and a penalty may apply.
Can I take a loan against FD?
Yes, up to 90% of FD value, at interest rates 0.5%-2% higher than the FD rate.
What is a tax-saving FD?
A 5-year fixed deposit eligible for ?1.50 lakh tax deduction under Section 80C.
Cannot be prematurely withdrawn.
Is the FD renewal process automatic?
You can opt for auto-renewal or manually renew at the prevailing interest rate.
Are FDs suitable for senior citizens?
Yes, as they offer 0.25%-1% higher interest rates for seniors.

Summing it up

Fixed Deposits are a secure, flexible, and low-risk investment option ideal for individuals seeking stability in returns. Whether you’re saving for short-term goals, building an emergency fund, or looking for tax-saving opportunities, an FD can be a reliable choice.