What is a Fixed Deposit (FD)?

Fixed Deposits (FDs) are bank accounts providing one of the highest interest with a specific lock-in condition. Fixed deposit accounts allow investors to earn interest over their lump sum investments over a long period. Apart from banks, it is also provided by financial institutions and companies.Therefore, understanding what is the meaning of fixed deposit accounts, their types and interest rate calculation is crucial to deciding about investment. Let’s explore these topics in detail.

How Does an FD Work?

The fixed deposit meaning is constrained to its name, which indicates a fixed maturity for the investment. 

• In this, the banker or issuer opens a separate term deposit account. 
• Investors make a one-time investment in this account for a specific maturity period. 
• This deposit earns interest that is usually higher than other accounts. 
• Investors have the option for auto renewal and can also withdraw the investment early with cost of interest.   

The interest is earned based on the financial institution’s norms and monetary conditions in the country. FDs are separate accounts in the institutions like:

> Commercial Banks

> Non-Banking Financial Companies (NBFCs)

> Cooperative Banks

> Housing Finance Companies

> Post Offices

However, one should invest in an authorised instrument to avoid the default risk. Individuals with lump sum investment amounts may find FDs a suitable investment avenue.

How is the Interest on FD Calculated?

Investors should be clear about its different aspects, like interest, tenure and other norms. FDs may earn compound simple interest. Its calculations are as follows:

A = Investment Amount

R = Annual Interest rate on FD

T = Tenure of investment in years

• Simple Interest: Investors will get the same interest amount every year.

Interest = A*T*R/100 

Total Amount = A + Interest

• Compound Interest: Investors get interest over the interest.

Total Amount = A*(1+R/100)^T

When investors withdraw FDs early, they lose interest in the remaining days of the year. It is calculated by multiplying the annual interest amount, with days remaining divided by 365.  This interest may not be competitive with market returns, but they seek to provide an edge of safety.

Who Qualifies to Open a Fixed Deposit Account?

Fixed deposit is a term deposit account facility and it requires fulfilment of some criteria such as:

• Nationality: Regular FD accounts allow resident Indian investors. For Non-Resident Indians, banks may offer separate accounts.
• Age: All investors above 18 can open it. Those below 18 need a guardian or parent’s assistance for the same.
• Senior Citizen FD: It requires depositors to be above 60 years. 

Features of a Fixed Deposit (FD)

The term deposits have separate features from the regular accounts. Here are some common features of fixed deposit:

• Fixed returns – They provide security of returns due to lack of market exposure and credibility of facility issuing authority.
• Flexible tenures – It has very low minimum tenure and can potentially suit investors with different time horizons. The lowest tenure is 7 days.
• Loan facility – Investors can use FD as a collateral against the loan.
• Auto Renewal – It is an available option that investors can avail to renew the FDs at the end of period to avoid missing interest.
• Regular payouts – Investors can get periodic interest payouts.
• Liquidity – Depositors can withdraw the investment amount before maturity, but it may cost them some interest.

Common Types of Fixed Deposits

Understanding what is meant by a fixed deposit account, how it works and the criteria, investors can explore different types of fixed deposits to select the suitable one. They are categorised based on different aspects as follows:

• Based on Tenure

1. Short Term – Maturity of 7 days to 1 year.
2. Medium Term – Maturity of 1 year to 3 years.
3. Long Term – More than 3 years FD. 

• Based on Amount

1. Regular – Relatively a regular and small amount FD.
2. Jumbo – It may have deposits in lakhs or more.

• Based on Depositor

1. Individual – These have a single depositor.
2. Joint – They may allow two or more people to invest.

• Other Types

1. Cumulative vs Non-Cumulative – In the earlier types, interest is paid at the end of tenure, while in the latter form the interest is paid regularly.
2. Senior Citizen – People aged above 60 years can invest in them.
3. NRIs Fixed Deposit – The investors falling in the legal definition of NRI can invest in this type.
4. Flexi FDs – Depositors can withdraw part funds from FD in this type.
5. Corporate FDs – These are issued by the companies.
6. 5-year Tax saving FD – They offer deduction under section 80C of the Income Tax Act, 1961.

Note: The minimum investment, tenure, interest rates, and other regulations may differ for every institution. Investors should inquire about them carefully before investing.

Advantages and Disadvantages of Fixed Deposits

Evaluate the pros and cons of fixed deposits to get a holistic view of this instrument.

Advantages of FD	Disadvantages of FD
Safety of returns due to institutions like banks and NBFCs. Suitable for risk-averse investors.	The fixed term may hinder the investment as early maturity attracts a penalty in the form of interest.
Tax deduction with some types of FDs.	Rigid interest rates. The market offers better alternatives for it.
Loan facility against FDs.	All regular FD types attract tax liability.

Tax Implications on Fixed Deposits

Tax implication is a crucial aspect of fixed deposit interest and the investment amount. Generally, the interest earned on fixed deposits is taxable under the head of ‘Income from Other Sources’. Other than that, fixed deposit taxation is as follows:

• Tax Deducted at Source (TDS)

Here, the depositors should note that banks or financial institutions issued fixed deposit accounts are the source of their interest. They deduct 10% TDS under section 193. This rate becomes 20% when the depositor does not have a PAN card. One can submit forms 15G or 15H if their total income is below taxable limits. Also, depositors can claim it while filing their income tax returns.

Conclusion

Many new-generation investors may not even know what does fixed deposit means. However, this blog can provide them with potential insights about the investment instrument and help them evaluate it holistically. They may not have returned to the market, but their safety makes them a significant diversification option.

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FAQs on What is Fixed Deposit

1. What is the minimum amount required to start a fixed deposit?

The minimum investment criteria in FDs may differ for different banks and their schemes. Usually, this investment can start as low as ₹1000. However, individuals should seek information about the same from particular banks or financial institutions.

2. Can I access my money before the maturity of my FD?

Yes, investors can withdraw their money before maturity, but they may be charged with some penalty for this. Moreover, they will also lose interest for the rest of the days of that year.

3. Is it safe to invest in a fixed deposit?

It is considered one of the most safe instruments. However, a minor risk of default may be there in such an investment. Investors should seek FDs in trusted financial institutions.

4. What is the key differentiator between fixed deposit and recurring deposit?

These are two types of accounts. FDs are lump sum investments with a fixed maturity. In contrast, RDs are frequent instruments like SIPs. At a frequent interval, investors deposit a fixed amount in RDs. The main difference between them is the frequency of investments.

5. How is fixed deposit so safe?

The financial institutions or banks issuing the facility of this account help reduce the credit default risk. Moreover, fixed deposits do not have any exposure to markets, which makes it  a safe investment instrument.