How FD Works?
What is a Fixed Deposit?
A fixed deposit is a financial investment instrument offered by banks and non-bank financial companies in which investors can deposit money and earn a higher rate of interest than a standard savings account. Fixed deposits are the most widely used investment vehicles in India. For many years, FDs have been synonymous with investing because they are considered safe, provide guaranteed returns over time, and are also flexible in terms of duration.
You will receive fixed returns regardless of how interest rates move or how the economy performs at the time of investment. You can also get interest on the interest amount. This allows you to easily accumulate a large sum. Fixed deposits are available on a wide range of time periods, ranging from 7-14 days to 10 years. A term deposit is another name for a fixed deposit.
Features of an FD
Here are some of the features of Fixed Deposits
- Safer than other types of investments.
- Allows you to earn interest over a set period of time.
- Tenure options ranging from one to ten years.
- There is no maximum deposit amount.
- Senior citizens are subject to higher rates.
How Does an FD Account Work?
When you invest your money in fixed deposits, you effectively lock in the amount for a set period of time. You can earn interest on the principal sum on a cumulative basis throughout the tenure. After each specified interval, the interest earned is added to the principal amount.
Because the tenures are flexible, you can manage multiple FD accounts with different tenures. As a result, you will be able to earn a higher return on your investments. Senior citizens are entitled to higher rates, typically ranging from 0.25 percent to 0.65 percent higher than the current rate. Aside from that, non-resident Indians (NRIs) can open FD accounts in India in the form of NRE and NRO FDs.
If you already have a savings account with a bank, you can open a term deposit account with them. There are some banks that will allow you to open an FD account even if you do not have a savings account with them. However, such banks require you to go through a KYC process in which you must present relevant documents such as ID proof, address proof, passport size photographs, and so on.
Benefits of Fixed Deposit
- Low risk: Market risks have no effect on your fixed deposit returns.
- Insurance: The RBI insures your deposits up to Rs.1 lakh.
- Loan against FD: You can borrow up to 90% of your deposit amount at extremely low interest rates. This is usually around 2% higher than the FD interest rate.
- Simple liquidity: In the event of an emergency, you can quickly liquidate your FD and release the funds.
- Regular income: You can have the interest amount credited to your account on a monthly, quarterly, or annual basis.
- Tax advantages: Investing in tax-saving fixed deposits can result in tax deductions of up to Rs.1.5 lakh per fiscal year.
- Senior citizens: When compared to regular customers, senior citizens are offered a higher interest rate.
- Earn interest on your deposits and enjoy your savings grow.
The entities listed below are eligible to open an FD account in India:
- NRI Indian resident
- Senior citizens
- Firms that form partnerships
- Individuals or groups of investors
- Clubs and societies
- One-person business
How to open a Fixed Deposit
There are two ways to open an FD: online and offline.
Online: It is easiest to open an FD account online with the bank with which you already have an account. All you have to do is log in to your net banking account, complete the online form for opening an FD, and submit it. In such cases, KYC is not required because your bank already has the information. You can use the internet banking service to transfer funds from your account.
Offline: Go to your bank’s nearest branch and fill out an application form to open an FD account. Submit it to the bank official along with the necessary documentation. You will receive the FD receipt once you have deposited the required amount.
How to Calculate FD Rates
You can use a free online interest calculator to determine how much interest your fixed deposit will earn over a given period of time. The FD Calculator will calculate how much your deposit will yield at maturity based on the interest rate and the principal amount. This is calculated using a variety of factors, including the interest compounding frequency, which varies depending on the bank. It can be done monthly, quarterly, semi-annually, or annually.
What happens if I want to cash out my FD before it matures?
In case of an emergency, most banks allow you to withdraw your FD before it matures. Early withdrawal will result in a small penalty charge as well as the loss of interest for the remainder of the term. Tax-saving FDs cannot be withdrawn prematurely.
Is FD tax-free?
No, it isn't tax-free. However, if you choose tax-saving fixed deposits, you may be eligible for tax exemptions. Under section 80C of the Indian Income Tax Act, 1961, you can claim a deduction of up to Rs.1.5 lakh for such FDs.
How do I get a TDS exemption?
Individuals with interest earnings of less than 40,000 per year (50,000 for senior citizens) are eligible for TDS exemption. Form 15G can be submitted by investors, while Form 15H must be submitted by senior citizens.
Is it possible to get monthly interest on my FD?
Your FD interest can be compounded monthly, quarterly, semi-annually, or annually, depending on your preferences. Compounding on a regular basis, on the other hand, can lower the rates.
What exactly is an FD nomination?
You will be asked to name a nominee for your FD as an FD investor. If you die before the maturity date, the money will be given to your nominee. It is not required to have a nominee, but it is strongly advised.