When you think of savings that give guaranteed returns, fixed deposits are usually the first to come to mind.
According to a study by the Securities and Exchange Board of India (SEBI), 95% of surveyed families preferred investing in a fixed deposit scheme. Another survey by Statista revealed that in 2020, Indian households had an aggregate deposit of Rs.46 trillion in fixed deposit accounts.
For most investors, fixed deposits are a haven for depositing their hard-earned savings. Such deposits are protected from the threats and risks upto some extent and give stable returns.
You can choose any suitable tenure to deposit your money and get a guaranteed interest income. That is why fixed deposits are so popular with small and big investors alike.
What is a fixed deposit?
A fixed deposit scheme is one wherein you deposit a lump sum amount for a fixed tenure and at a fixed interest rate. After the term ends, you get a lump sum amount.
For instance, you deposit Rs.15,000 for three years at 7.65% per annum. After three years, you would get a lump sum of Rs.18,713.
How does a Fixed Deposit Account work?
You can open an FD account with any financial institution offering the same. But, first, you decide the amount you want to invest and the deposit term.
On the other hand, the financial institution determines the interest rate you can earn on your deposit. This interest rate depends on the following factors –
- Your age (senior citizens earn a higher rate of interest)
- The term of the deposit
- If you choose for auto-renewal facility
- The repo rate set by RBI
After you open the account, the interest is earned and compounded periodically. You continue making interest at regular intervals over the deposit term. Once the period ends, you get a lump sum amount on maturity.
What are the different types of fixed deposit accounts?
In India, you can choose to invest in various types of fixed deposits. Here’s a look at some of the most popular types of FDs that you can choose from –
- Standard fixed deposits
Standard fixed deposits are the traditional deposit schemes banks and post offices offer. You can invest a fixed amount of money for a fixed term. The rate of interest is guaranteed by the bank or post office. After the tenure ends, you get the amount invested and the interest earned in a lump sum.
- Tax-saving fixed deposits
As the name suggests, tax-saving fixed deposits are deposit schemes that help you save taxes. These deposit schemes come with a fixed term of 5 years.
The investment you make into the deposit is a deduction from your taxable income. You can claim a maximum deduction of Rs.1.5 lakhs on your deposit.
If you fall in the 30% tax bracket, this deduction helps you reduce your tax liability by Rs.45,000 (30% of Rs.1.5 lakhs).
Moreover, as a senior citizen, you also get to enjoy tax benefits on the returns you earn. Returns of Rs.50,000 qualify as a deduction from your taxable income under Section 80TTB of the Income Tax Act, 1961.
- Senior citizen fixed deposits
As is evident from the name, senior citizen fixed deposit schemes are those designed for seniors, i.e., individuals aged 60 years and above.
The interest rates are higher on these deposits. Senior citizens also enjoy tax deductions on the interest income under Section 80TTB up to Rs.50,000.
- Flexi fixed deposits
Flexi fixed deposits are deposit schemes linked to your bank savings account. The savings account has a sweep-in feature.
You specify a minimum balance you want to maintain in your savings account. If the savings account balance exceeds the specified limit, the excess is automatically transferred to the Flexi fixed deposit account.
For instance, you open a Flexi fixed deposit account linked to your bank savings account. You specify that the savings account balance is to be maintained at Rs.10,000 every time. In a month, your savings account balance goes up to Rs.13,000. In this case, Rs.3000 would be transferred to the Flexi fixed deposit account from the savings account.
Further, the benefits that flexi FDs offer over normal fixed deposits are primarily due to their flexibility and liquidity. In a typical fixed deposit, you are required to deposit a specific sum of money for a particular time period, with the amount earning fixed interest. If you wish to withdraw this amount before maturity, the financial institution will either not permit it or charge a penalty fee.
In such scenarios, Flexi Fixed Deposits can help you overcome this problem by allowing you to withdraw certain sums of money, which could be from your savings/current account linked to your flexi FD.
- Regular fixed deposits
Like standard fixed deposits, regular fixed deposits are the traditional deposit schemes that pay a guaranteed interest rate on your deposit.
You can deposit any amount (provided it is above the minimum amount of deposit required by the financial institution) and choose any term ranging from 7 days to 10 years.
On maturity, you get the lump sum amount containing the amount you deposited and the interest you earned.
- Corporate fixed deposits
Besides banks, post offices and NBFCs (Non-Banking Financial Companies), companies can offer investors fixed deposit schemes.
These deposits are called corporate fixed deposits since corporates offer them. The deposits usually carry a higher interest rate than bank or post office deposit schemes.
However, they are riskier since your deposit might default if the company fails to repay the deposit on time.
Types of fixed deposits for NRIs
While resident Indians can open a fixed deposit account, Non-Resident Indians (NRIs) are also allowed to open an account with an Indian bank.
Such deposits are beneficial for NRIs if they want to save in India. Moreover, the tax-saving deposits also allow NRIs to lower their tax liability on their income in India.
Besides NRIs, Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs) can also open these accounts.
There are two types of fixed deposit accounts that NRIs can choose from. These are as follows –
- NRO fixed deposits
NRO stands for Non-Resident Ordinary. NRO fixed deposits are meant for NRIs who have a source of income from India. Such NRIs can open this account which is a rupee account.
The amount deposited into the account cannot be repatriated outside India, which means that the NRI cannot remit the deposit amount to a foreign country where he resides.
The interest earned, however, is freely repatriable to any country subject to a limit specified by the Reserve Bank of India (RBI).
NRO fixed deposits have attractive interest rates, and NRIs can open these accounts jointly with a resident Indian individual. The interest income, however, is fully taxable in the hands of the NRI at the applicable tax slab rates.
Moreover, if the interest income is more than Rs.10 lakhs in any financial year, an additional surcharge of 10% would also apply to the tax liability.
- NRE fixed deposits
Non-Resident External fixed deposits are accounts wherein the money is deposited in foreign currency. The account allows the NRI to repatriate the deposit amount freely, without limits.
While NRIs can make deposits in foreign currency, the account is denominated in INR only. The warranty is converted to INR and then held in the account.
NRIs can also choose 5-year NRE fixed deposit accounts to save taxes under Section 80C.
The interest earned from this account is tax-free in the hands of NRIs, so this account is quite popular.
How to choose a suitable fixed deposit?
With the different types of bank deposits available, finding the most appropriate scheme for your needs becomes challenging.
Here are some tips that would help you choose a suitable fixed deposit scheme that aligns with your investment objectives –
Firstly, select the term of deposit which suits your needs. For example, you can choose a long-term deposit scheme if you do not have to fulfil any financial goal in the next couple of years. However, if you are saving for a purchase you intend to make soon, choose a short-term deposit tenure.
Remember, fixed deposits lock in your money for the term you choose. So, ensure that the lock-in period matches the time you want to invest.
- Premature Withdrawal
Premature withdrawal means withdrawing your deposit before the chosen term ends. For instance, you open a fixed deposit account for three years but withdraw the money after two years and six months. Hence, the said withdrawal would be termed premature.
Premature withdrawals are not usually allowed. Even if allowed, you incur a penalty if you withdraw the amount before the term ends.
This penalty reduces the compelling interest that you earn from the deposit.
So, try and avoid making premature withdrawals. Choose the deposit term wisely, and stay invested for your chosen period.
- Rate of Interest
Banks, post offices, NBFCs and corporates offer fixed deposits. However, the interest rates vary across each financial institution.
So, after selecting the type of FD you want to invest in, compare the interest rate on the account across different financial institutions.
Choose an institution with the highest risk-adjusted interest rate to maximise the returns earned from your fixed deposit investment.
- Additional Advantages
Check the other advantages that the fixed deposit has to offer. Many deposit schemes come with additional benefits to attract investors. For instance, you might find features like –
- The flexibility of premature withdrawals
- Higher interest rates on long-term deposits
- Additional insurance cover
- Discount on locker rentals, etc.
- Choose a fixed deposit scheme with the maximum additional features to get the full benefits from your investment.
Fixed deposits can be the right choice if you are looking for guaranteed returns on your deposits and want to save for a specified amount of time.
With the different types of fixed deposits available, you can also choose a scheme that suits your financial needs.
Understand the types of bank deposits available, use the tips mentioned above and pick the right fixed deposit scheme to save your hard-earned money.
FAQs about types of Fixed Deposits
What are the documents required for opening an FD account?
You would need to submit the following documents for opening an FD account –
1. Identity proof like your PAN Card, Voter’s ID card, passport, Aadhaar card, etc.
2. Address proof like your utility bills, rent agreement, passport, Aadhaar card.
3. Also, fill out and submit the account opening form, and the account will be opened.
What is the insurance benefit on a fixed deposit?
The Deposit Insurance and Credit Guarantee Corporation (DICGC) offers each depositor an insurance of upto Rs. 5,00,000 for both principal and interest amount held by him/her.
What is the taxation on FDs?
The amount you are taxed depends on the income tax slab to which you belong and its applicable rates. However, if you choose tax-saving FDs, your investments, up to Rs.1.5 lakhs, are tax-free under Section 80C.
Returns earned on FDs are taxed basis your tax slab rate. However, senior citizens enjoy tax-free returns up to Rs.50,000 under Section 80TTB.
Who should invest in Fixed Deposits?
Fixed deposits are suitable for those who
1. Want to invest their money for a fixed period
2. Want guaranteed returns on their investment
3. Want to avoid market volatility
What is the maximum deposit amount for FDs?
Usually, there is no limit on the maximum deposit amount. You can deposit any amount that you want.
What is the difference between RD and FD?
Under RDs, you deposit a fixed amount of money at regular intervals throughout the deposit tenure. However, under FDs, you deposit a lump sum amount of money once when you open the account.