What is a Fixed Deposit (FD)? Meaning, Definition & Benefits

Consider an eclectic group of Indians: a fresh graduate, a homemaker, a salaried person, a business owner, and a retiree. If asked to invest individually, where would they be most likely to put their funds?Going by various surveys, most people in the group would probably park their funds in fixed deposits or FDs.In 2017, a study by the Securities and Exchange Board of India (SEBI) found that over 95% of Indian households preferred fixed deposits to other investment avenues such as mutual funds or stocks. Other surveys, too, have come up with similar findings.So, what is an FD exactly, and what about this investment option makes it so very attractive to the average Indian? Let’s explore the term.

A fixed deposit is an investment scheme offered by banks and financial institutions where investors can park a lump sum amount for a specific period, earn interest during that period, and when the investment period ends, get back the principal amount along with interest accrued up until then. The time period – or the “maturity period” – generally ranges from seven days all the way up to 10 years.The fixed time frame makes the fixed deposit scheme sort of a time deposit, meaning it is an interest-bearing bank account scheme that has a pre-determined date of maturity. In this respect, it is also similar to company fixed deposits , which are offered by organisations that work on the same principle.The rate of interest offered on a particular fixed deposit scheme will vary as per the varying maturity periods – the longer the tenure, the higher the interest rate.The interest rates offered on FDs are higher than those offered on savings accounts with more for senior citizens, but that is not the only attractive aspect of fixed deposits; the scheme also lets you enjoy tax benefits. You will be eligible for tax exemptions under Section 80C of the IT Act 1961 on deposits of up to a maximum of Rs.1.5 lakh in a financial year. However, to avail of the tax-saving benefit, you must choose a lock-in period of five years; in other words, you will not be allowed to withdraw funds prematurely before that time has passed.So, what is the meaning of a fixed deposit ? It is a one-time deposit with a bank or financial institute made for a stipulated period that accumulates interest. The amount of interest is dependent on the duration and the amount deposited. No additional amount can be added to this at a later time, and no withdrawals can be made from the account during the maturity period. That is the general practice; in case a bank offers premature withdrawal, the interest rate offered will likely be lower.In other words, a fixed deposit, by definition , is a deposit that has a fixed deposit period, and a fixed rate of interest.Should you want to withdraw the money prematurely, i.e., prior to the date of maturity – you would have to pay the bank a penalty or lose interest.The scheme is convenient when you have a disposable lump sum amount, for example, a small sum in the form of a bonus, a gift or even a tidy amount as tax returns. By opening a fixed deposit account and parking the money for a set time – say three years – you can build a small corpus that will be higher than what you would have earned should you have kept it in a savings account. This is simply because the interest rate offered is higher.If you have several fixed deposit accounts, you can plan for a big cumulative corpus to meet a financial goal, like making a down payment on a house.You can renew your fixed deposit account should you wish. Usually, a bank will issue a different receipt for each fixed deposit; this is known as an FD receipt. This receipt implies that the fixed deposit scheme it was issued for is one distinct contract, separate from other FD accounts that you may have.You need to present this receipt at the bank at the time of renewal or encashment if you want to close the account.These days, leading banks have a provision for the automatic renewal of a fixed deposit account. All you need to do is issue instructions to the bank about wanting to continue with the new matured deposit. On the day of maturity (also the day of renewal), your fixed deposit can be renewed at the prevailing rate of interest. Also read: How Do Fixed Deposits Work?

Ask yourself one question: what do you want most out of your investments? Let’s assume the four most basic requirements -

1. Your money should grow, i.e., you would look for wealth creation.
2. Your investment should be safe.
3. You would not want to deal with the hassles often associated with investing.
4. You would want your loved ones to benefit from the investment.

Fixed deposits offer all these, and furthermore, there is also a tax benefit to be availed of. All of this makes it a good investment option. Let us consider each point -

• Wealth creation : The interest earned is more than that of a savings account for the same principal amount deposited over the same period.
• Risk : A fixed deposit, generally, is thought to be a less risky instrument and one that investors have turned to for an assured income on their idle funds. Unlike market-linked investments, FD returns are fixed on the date you open the account.
• Hassle-free operation : You can set up an FD account online in minutes. Aside from being a common financial product that banks offer, setting up an FD requires minimum documentation and paperwork.
• Early withdrawal : In case of emergencies, say for the medical treatment of a loved one, the FD can be broken and the freed-up cash utilised.

Also read: Difference Between A Regular FD And A Tax-Saving FD

With fixed deposits, interest payouts are disbursed in two ways: as cumulative deposits and as interest non-cumulated.In the first option, the interest is paid once – at maturity. It is compounded quarterly and reinvested, enabling you to earn more as the cumulative deposits are made of both the principal and the interest. Plus, the rates are usually more.In the second option, interest is non-cumulated, allowing payouts to be made monthly, quarterly, half-yearly or annually, as per the investor’s choice.Please note the interest earned is taxable.

A fixed deposit investment is a low-risk investment option that gives you the perfect avenue to invest your idle money, grow your wealth, and reach your financial goals.Today, investments are vulnerable to market fluctuations; FD investments, however, are quite immune. It is because the interest rate that is determined for a fixed deposit is the rate prevalent at the time the account is opened; this rate remains constant despite any economic and political turbulence. As a result, the investment yields returns as per the investor’s calculations.For instance, right now – the first half of 2023 – will be a good time to invest in fixed deposits. The Reserve Bank of India (RBI) has increased the repo rate (rate at which banks borrow from it) six times between May 2022 and February 2023. This has led to an increase in FD interest rates offered by banks, which benefits depositors. Also, the guaranteed return upon maturity makes fixed deposits one of the safest investment options to ensure wealth creation and the investor’s financial growth.This apart, if you opt to open your fixed deposit account with a bank, your investment will have the protection of the RBI, as it guarantees up to Rs 1 lakh against insolvency of the bank.However, it is important to know that, typically, the interest rates offered by the banks on their fixed deposits are lower than that offered by corporate fixed deposits, even though they provide assured returns.At the same time, there are certain things that you need to be aware of when investing in fixed deposits:

• Minimum deposits : This can vary from state-owned banks to those in the private sector. Government banks generally stipulate a minimum deposit amount of Rs 1,000 to open an FD account; this is typically higher for banks in the private sector. There is no upper limit for either group. In fact, if your deposit exceeds the sum of Rs 1 crore, it will be classified as a bulk deposit, which means a higher rate of interest, and therefore, bigger earnings.
• Interest earnings : Depending on the maturity period, you can earn interest at rates ranging from 3.75%-7.25% on your FD. Interest rates can change periodically due to factors such as inflation, investor demand, government policy decisions and, of course, RBI rates. If you are a senior citizen, you can benefit from a higher rate of interest; typically, rates are 0.50% more for people 60 years of age and above. Interest is calculated by the compounded method, on a quarterly, monthly, half-yearly and annual basis, as per your preference.
• Maturity : On maturity, you can opt to reinvest both the principal amount and accrued interest for another term, reinvest just the principal, or withdraw the lump sum in its entirety. While applying for the fixed deposit account, remember to indicate how you would like the fixed deposit amount to be handled on maturity. If you don’t do it, it will lead to the cumulative amount – principal and the interest accrued over the term period – being reinvested automatically. However, if you are keen on growing your wealth, it is advisable to reinvest the entire amount and not make a premature withdrawal, as it brings down the interest rate.
• Penalty : If you decide to terminate your FD before maturity, you may have to pay a penalty. While the exact penalty percentage may vary from bank to bank, you may be liable to pay a penalty of anywhere between 0.5% and 1% of the principal amount. Exceptions made are often at the discretion of the bank; it may waive off a penalty, but usually only if the investor agrees to make the reinvestment with the same bank.
• Liquidity : Depending on the terms and conditions of your fixed deposit account, partial withdrawals may or may not be allowed. Partial withdrawals on tax-saver FDs, for example, are prohibited. For regular FDs, partial withdrawals may be allowed. However, in that case, interest rates may be revised downwards on the residual amount.

In this connection, it is important to note that the interest earned on your fixed deposit is subjected to taxation. It is added to your income and taxed as per your existing income tax slab. Also, in case you do not want your bank to deduct TDS from your deposit, you need to submit Form 15 G/15 H (for senior citizens) in the first week of April.

A bank FD is one of the most popular savings schemes for Indian investors, and it is so primarily because it offers better interest returns than savings bank accounts. Investment goals vary from person to person, as do multiple aspects of investing: the time frame, the risk horizon, the investible amount, one’s financial stability, and even responsibilities.Consequently, it is advisable to weigh in more than one factor when it comes to which bank you should consider for opening your fixed deposit account. The best bank is the one that benefits you the most. Let us have a look at the major factors to consider:

• Interest The single-most important factor to consider is the rate of interest offered by a bank or financial institution since FDs are all about interest earnings. Thus, it is critical you compare the rates of interest offered by the various banks before selecting a bank FD scheme to invest in.
• Credit rating Before making a decision to invest in a particular fixed deposit, it is advisable to consider the rating from organisations like ICRA and CRISIL. The best rating from CRISIL , for instance, is FAAA; it indicates a strong degree of safety regarding timely payment of interest.
• Loan There is no knowing when a financial crisis will crop up; it is essential that one is always ready for the unexpected. Many banks offer loan facilities against your FD. Choose a bank that does, so you have an added financial cushion in case of a financial emergency. Also, check how much of a loan is offered.
• Premature withdrawal Some banks allow premature withdrawal when you invest in an FD scheme. Though it may attract a penalty, it is handy during financial emergencies.
• Penalty rates It is also important to check the penalty amounts that can be added if you are forced to make a premature withdrawal.

Also read: 10 Interesting Facts about Tax Saving Fixed Deposits

There is no ceiling on how much you can invest in a fixed deposit account; however, banks offer customised interest rates to investors who put in more than Rs 1 crore in FDs.Tax exemptions for fixed deposits are up to a standard Rs 1.5 lakh in one financial year.

There is a string of upsides to opening a fixed deposit account:

• Guaranteed returns One of the biggest advantages of a fixed deposit account is its assured returns. This factor is risk-free compared to investments such as mutual funds.
• Tax exemptions For many, the fixed deposit is a great tax-saving option; in fact, the tax exemption it enjoys makes it quite popular among salaried individuals and businesspeople. However, to avail of this benefit, the fixed deposit must be locked in for at least five years.
• Higher rate of interest FDs offer investors a higher rate of interest than a savings account or any other form of term deposit. This makes them great wealth creators.
• Flexible tenure With FDs, you can have both a very short-term investment horizon and a long-term outlook since maturity periods stretch from a minimum of seven days up to 10 years. This allows different types of investors to consider the scheme for meeting their financial goals. Plus, you can always keep reinvesting.
• Multiple FD accounts Another factor that helps investors reach their goals with FDs is the leeway to hold more than one account at any given point in time. You don’t have to make a big investment all at once; you can choose to open a new FD account for additional investment.
• Loan facility You can avail of a loan up to 90% of the principal amount and the interest earned till then against your investment.
• Easy to open Finally, you can open an FD account in a matter of minutes by either applying for it online or offline at your nearest bank.

Like any other investment, the FD, too, has its downsides:

• Low interest rate Being risk-proof also means the interest rates quoted for FDs are lower compared to other investment avenues. So, while an 8% rate of interest earned on an FD may be higher than a savings account’s, it would still be lower than what mutual funds would fetch (more than 20% or 30%).
• Inflation offset During a downturn, the already low interest rate can get even lower than the rate of inflation. When this happens, gains from FD investments get negated.
• Flat rate While having a uniform pre-determined interest rate provides immunity to the FD investment against market turbulence, what it also does is block the investment from earning more when the markets are doing well.

Fixed deposits have traditionally been the preferred investment choice for generations in India, primarily because their returns are guaranteed and higher than those of the plain vanilla savings account. What also appeals to investors is that it entails lower risks. This means if you have a small appetite for risk but still want a decent rate of return, it is the perfect investment option. With a fixed deposit account , you will also enjoy tax benefit options, though the interest earned will be taxed.It is especially ideal for long-term investment goals. However, FDs can also be availed for periods as short as seven days.There are certain things that you need to be aware of when investing in fixed deposits. Yet, overall, it ticks several boxes, making it an eternal favourite for the Indian investing public.