Different Types of Fixed Deposits: A Complete Overview

A fixed deposit (FD) refers to a savings vehicle where an individual or a firm can deposit a pre-defined amount of money for a pre-determined tenure and earn a fixed interest. Financial institutions provide different types of fixed deposits depending on the needs of their customers. 

Understanding the different types of FDs is important so that investors can select an FD that best suits their goals. This article provides insights into various types of fixed deposits. 

What is FD?

Banks and other financial institutions offer a type of savings account where customers can lock in their money for a pre-determined period of time and earn an interest higher than a normal savings account called an FD. Premature withdrawals by customers can be penalized by banks. 

FD is a low-risk savings and investment vehicle and provides a stable source of earnings. Those investors who cannot bear the risk of financial instruments like stocks, mutual funds, etc, can choose to invest in fixed deposits. Deposit Insurance and Credit Guarantee Corporation (DICGC) provides insurance of Rs. 5,00,000 for FDs and other deposits in case the bank goes bankrupt. 

Types of Fixed Deposits 

Financial Institutions can offer a wide variety of fixed deposits tailored to the needs of their customers. It is difficult to say exactly how many types of fixed deposits are available since each financial institution can have its own versions. Fixed deposits can be differentiated broadly based on the following:

1. Investor Type – Based on investors, FDs can be categorized into regular FDs, senior citizen FDs, and Corporate FDs.

• Regular FD – These are the most common types of fixed deposit. Investors deposit a sum of money in a regular FD ranging from 7 days to 10 years (some banks can offer even longer FDs). The interest earned from an FD is higher than a savings account, and it is taxable. Investors cannot withdraw money before maturity without facing a penalty. 
• Senior Citizen FD – For citizens above 60 years of age, financial institutions offer a rate of interest that is slightly higher than regular fixed deposits. The reason behind offering a higher rate is because, in many cases, the interest earned from fixed deposits is the only income that a senior citizen earns. 
• Corporate FD – Corporate or company FD is provided by Non-Banking Financial Company (NBFCs) and housing finance companies. These are suitable for investors who want a comparatively higher rate of return. These FDs come with the risk of financial instability of the institution. Investors should check the credit rating of the financial institution and not just chase higher interest rates. These FDs are not insured by DICGC.

2. Payout Option: Depending on when the interest is paid, FDs can be divided into cumulative and non-cumulative FDs.

• Cumulative FD – These FDs do not pay interest regularly and instead keep accumulating the interest. The interest is paid along with the principal when the FD matures. This FD provides the benefits of compounding. 
• Non-cumulative FD – A non-cumulative FD pays interest periodically. The interest can be paid monthly, quarterly (after every 3 months), half-yearly, or annually. These are suitable for investors who want a regular stream of income. 

3. Special Features FD – Special feature FDs are types of FD that can be suitable for some investors depending on their needs: 

• Flexi FD – A flexi fixed deposit offers benefits for both savings accounts and FD. Flexi FDs is a feature provided by some banks where the excess amount in a savings amount is automatically transferred to a fixed deposit for one year. This excess amount is transferred if the money is sitting idly in the savings account for a time. Investors have an option to withdraw money from FD before maturity. 
• Floating Rates FD – These FDs do not have a fixed rate of interest, unlike other FDs. Interest rates of a floating rate FD are dependent on a reference rate, which can be RBI’s repo rate on any other rate. If the reference rate goes up, so do the interest rates on the FD. 
• Tax-Saver FD – Tax saver FDs are only available for Indian residents and Hindu Undivided Families (HUF). Rs.1,50,000 deposited in tax-saver FDs are exempted from tax (section 80C). The interest on a tax saver FD is taxable, and the exemption is only for the principal amount. 

4. Non-Resident Indians FD – Non-resident Indians are Indian citizens who live and earn income from abroad. There are various types of fixed deposits for NRIs. 

• Non-Resident External (NRE) – NRE deposits are rupee-denominated. Non-resident Indians who want to deposit their money in India can get their foreign currency converted into rupees and deposit it in NRE accounts. These are tax-free and fully repatriable. The reason for these deposits being tax-free is to encourage more savings in India and attract foreign currency. 
• Non-Resident Ordinary (NRO) – NRIs who have an income source in India can choose to open NRO deposit accounts. These are similar to domestic deposits, and the interest earned is taxable. 
• Foreign Currency Non-Repatriable (FCNR) – These FDs allow NROs to make deposits in foreign currency. The foreign currencies allowed under FCNR are US Dollars, Japanese Yen, Canadian dollars, Euro, pound sterling, and Australian dollars. This allows NRIs to deposit their foreign currency in India and earn tax-free income.

5. Withdrawal Option : Based on the option to pre-maturely withdraw money from an FD, these can be divided into callable and non-callable FDs. 

• Callable FD – Callable FD is a type of fixed deposit where depositors can withdraw their money before maturity. A penalty is levied for premature withdrawals. 
• Non-callable FD – Non-callable deposits do not allow premature withdrawals except in special cases like bankruptcy, death, winding up of business, etc. They provide a higher rate of interest than callable deposits. 

How to Choose The Right FD? 

Before choosing the right FD, you should compare FDs provided by different institutions. An individual can consider these factors for comparing different types of fixed deposits: 

• Tenure and Rates:  FDs with higher tenure can provide higher rates of interest, whereas FDs with lower tenure might provide lower rates. The rate of interest and tenure of FD must be thoroughly compared to various financial institutions before choosing one. The minimum deposit may also vary among various institutions. 
• Tax Implication: Understanding how the interest on FD is taxed and comparing different types of tax-saving FDs is necessary to choose the right FD.
• Credibility of Institution: Financial institutions with lower credit ratings usually offer higher rates of interest to attract investors. A lower credit rating signifies higher financial instability. Investors must carefully study the financial institution they are choosing to deposit their money. This is essential to avoid the risk of the financial institution itself going bankrupt. 
• Added Benefits: Some banks can provide added benefits over others, like lower penalties on withdrawals, more flexibility, etc. So, investors must carefully read all the scheme-related documents and choose the best option.

Conclusion

Among all the available types of fixed deposits, it is essential to understand how the different types of fixed deposit plans work to choose the option best suited for you. This helps in maximizing your returns. You can compare various FD schemes online by visiting the websites of various financial institutions.  You can open a fixed deposit online or by visiting the bank. Are you willing to start your investment and learning journey? Download the Powerup’s Financial Management app today!