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What is a Fixed Deposit?
Compared to other investment options such as stocks or mutual funds, 'Fixed Deposit' is safe and provides assured returns. Fixed Deposit is commonly called 'FD'. In a Fixed Deposit, a lump sum amount of money is deposited in a bank account at a fixed rate of interest for a fixed time period. And when the time period is over., the amount invested by the depositor is received along with compound interest.
Features and benefits of Fixed Deposit
To understand Fixed Deposits effectively, it is very important for you to know the main features and benefits of Fixed Deposits, which are as follows:
- Money invested in fixed deposits never sinks. In this, both the amount deposited with the guarantee and the interest is received simultaneously after a fixed interval of time.
- Money invested in fixed deposits remains safe and stable.
- If the investor wants to earn more profit, then he can extend the tenure of the fixed deposit or increase its investment.
- If the investor wishes, he can take the fixed deposit returns monthly, quarterly, half-yearly, or annually, then he can take them easily.
- A loan can also be taken through a fixed deposit.
- Opening a Fixed Deposit account is easy.
- A person can open multiple fixed deposit accounts.
- By opening this account in a good financial institution or bank, profits can be earned with the highest interest rate.
Types of Fixed Deposit
There are different types of fixed deposit accounts, which are as follows :
(1) Tax saving Fixed Deposit
Money is deposited for at least five years in a tax-saving fixed deposit. The profit i.e. interest earned from this is taxable. The principal amount invested in this scheme is exempt from tax under section 80C of Income Tax 1961.
(2) Special Fixed Deposit
Banks or financial institutions offer higher interest rates in special fixed deposits. In this scheme, money is invested for a specific time period of 290 days and 390 days.
(3) Standard fixed deposit
In a standard fixed deposit, money is invested for a fixed period of time, a minimum of 7 days to 10 years, at a pre-determined rate of interest. If the money is withdrawn before time, then additional charges have to be paid.
(4) Floating Fixed Deposit
In floating fixed deposits, the interest rates change quarterly or annually.
How Does Fixed Deposit Work?
In FD, money is invested for a fixed period of time. This time can be between seven days to ten years. Once the tenure is over, the principal amount along with the profit is returned to the depositor at a predetermined interest rate. And if the money is withdrawn before the period, a penalty can be imposed. The tenure of the Fixed Deposit can be chosen by the depositor as per his wish. Some banks offer premature withdrawal facilities at a lower rate of interest.
How to Open an FD Account?
Fixed deposit accounts can be opened in two ways: online and offline.
(1) Offline Process
A fixed deposit account can be opened in any bank. Irrespective of whether the depositor is an account holder in that bank or not. Following is the account opening process :
- If you already have an account with the bank: For this fill out an application form and submit it to the bank. But before submitting the letter, make sure that as much money as you are getting FD done is already present in your bank account.
- If you do not already have a bank account: If you do not have a bank account, you will need to get your KYC done along with the FD application form, For which identity proof, address proof, and some other important documents will be required.
(2) Online Process
There is no need to visit the bank in the process of opening an FD account online. Benefits such as easy payment, termination, and FD renewal can be availed through this medium:
- Open the official website of the bank in the browser of your device, in which you want to open a fixed deposit account.
- Create an ID or log in with your existing ID if you already have an account with that bank.
- Select the FD Account option.
- Fill in the required details like principal amount, nominee, tenure, etc.
- Confirm your details and make your payment.
- Make sure to download the receipt for future reference.
- And if there is any problem in opening the account, then contact the customer care of the bank.
Taxation of FD
If the interest earned through fixed deposits exceeds a prescribed income tax limit, it is liable to tax. This earning is then declared in the tax return under the category 'Income from other sources'. And when the interest earned is deposited in the account by the bank, TDS can also be deducted from it. If the FD is made for three years, then tax will be deducted from the FD at the end of every year.
For example, if the interest amount exceeds ₹40,000 or $500, TDS will be deducted from the interest. But for senior citizens, the interest limit for TDS deduction is more than ₹50,000.
How is the Interest of FD Calculated?
The interest of FD can be calculated using the following mathematical formula: -
A = P(1 + r/n)^n*t
Where,
A: Maturity amount
P: Principal amount
r: rate of interest
n: compound interest frequency
t: Number of years
For Example, the Principal amount is ₹ 1,00,000, rate of interest is 7.5%, compound interest frequency is1 and Number of years is 1(12 in months), than Maturity amount as following :
A = 1,00,000(1+7.5%/1)^1*12
A = ₹ 1,07,500.
Where interest is, ₹ 7,500.
FIXED DEPOSIT CALCULATOR
Bottom Line
Ultimately, fixed deposits serve as a cornerstone of a well-diversified investment portfolio, providing stability and peace of mind to investors while preserving their capital.
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