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Fixed Deposit issuers in India

What is a Fixed Deposit?

A Fixed Deposit (FD) is one of the most popular financial instruments among investors as it provides a higher rate of interest than a regular savings account. It is considered one of the safest forms of investment. Money can be deposited in an FD account for a period that typically ranges from 7 days to 10 years. The rate of interest paid on a fixed deposit varies according to the amount deposited, period and the issuing bank/NBFC/Corporate, and typically ranges from 3.5%-9% per annum.

The defining criteria for a fixed deposit is that the money cannot be withdrawn before maturity, unless on payment of a penalty. Once the deposit matures, the bank credits the original amount plus the interest earned to the bank account of the customer specified during opening the FD. The money deposited earns a fixed rate of interest throughout the entire FD period.

Features of A Fixed Deposit Account

  1. Individuals can earn a decent interest on their surplus money. The interest earned on a fixed deposit is more than the interest earned on a savings account.
  2. The money can be deposited only once i.e. at the time of opening the FD. For additional deposits, separate accounts need to be opened. Customers can also choose to open a recurring deposit which allows them to deposit a certain amount every month. There are also flexi deposit schemes that provide options to deposit money whenever you have and close the account as per your need.
  3. The tenure on fixed deposits generally ranges from 7 days to 10 years. It can be renewed on maturity.
  4. The rate of interest differs from bank to bank, depending on the amount, period and internal policy of the bank.
  5. Money cannot be withdrawn from the account before maturity. However, withdrawals can be made on payment of a penalty charge.

Advantages of Fixed Deposit Account

  1. Risk-free investment that is best suitable for individuals who have surplus money.
  2. Depositors can avail of a loan against their fixed deposit.
  3. Investors can re-invest the amount with principal and interest upon maturity which accrues further interest earnings.
  4. Fixed deposits provide tax benefits under section 80C of Income Tax Act.

Disadvantages of a Fixed Deposit Account

  1. The interest earned is taxable. The interest earned is taxable in line with the income bracket of the individual, unlike certain other kinds of investments.
  2. Returns are lower, especially when compared to other, riskier, investment instruments, such as stocks, mutual funds and bonds.
  3. FDs come with an issue of liquidity. You cannot withdraw cash until the maturity date, unless on payment of a penalty.

How to calculate interest on a fixed deposit

The following is the formula to calculate the interest earned in a Fixed Deposit account:

A = P x (1 + r/n)nt

I = A - P

Where

A = Maturity Value

P = Principal Amount

r = Rate of Interest

t = Number of Years

n = Compounded Interest Frequency

I = Interest Earned Amount

Using the above formula, you can calculate the interest earned and the maturity value on the principal amount. There are several online sites that allow you to instantly calculate the interest earned.

Fixed Deposit Interest Rates

In general, FD rates offered by banks and other institutions are in the same range. The rate varies depending on the deposit amount and the tenure and also whether it is a domestic term deposit. Senior citizens (above the age of 60 years) enjoy a marginally higher rate of interest. Do keep in mind that these rates can change periodically. Following is an indicative list of bank FD rates from leading banks in India. For the latest FD rates offered by the various banks, please refer to the link below at the end of the article.

Documents Required to Open a Fixed Deposit Account

Typically, following documents are required to open an FD account.

  • Identity proof
  • Address proof
  • Signature proof
  • Age proof (for senior citizens)

You can produce your passport, driving license, voter identity card, PAN card, ration card or recent phone/electricity bills for identity and address proof. For signature proof, you can produce your passport, PAN card; even a signed cheque will suffice with some banks. Some banks might also require you to submit an introduction letter from an existing account holder.

Types of Fixed Deposit Schemes

Standard Fixed Deposit

This is a regular FD which has a fixed tenure ranging from 7 days to 10 years. The FD interest rate is determined at the time of deposit. The rate varies by issuer depending upon the amount deposited, the tenure, whether domestic term deposit, and senior citizen eligibility.

Tax Saving Fixed Deposit

A tax saving FD allows you to enjoy certain tax benefits but is accompanied by certain restrictions. This kind of FD has a minimum deposit period of 5 years and a maximum of 10 years. No premature withdrawal or even partial withdrawal is allowed for a period of 5 years. The benefit of this FD is that investors can claim a deduction of up to a maximum of Rs 1, 50,000 on money invested in this kind of FD under Section 80C of the Income Tax Act 1961. However, it is important to note that the interest earned on such FDs is fully taxable. The Fixed Deposit Receipt issued at the time of opening the FD is required for claiming the tax deduction.

As mentioned, the money invested in these FDs is locked in for at least 5 years. This is the minimum time-requirement to qualify for the deduction. If the deposit is encashed before maturity, the amounts held under this instrument do not qualify for deductions. In case of joint holders, the deductions can be claimed by the first holder of the deposit only.

Floating Rate Fixed Deposit

Some banks offer a floating rate fixed deposit scheme where the FD interest rate is not fixed. It fluctuates during the tenure of the fixed deposit depending on the changing reference rate. This allows investors to take advantage of changes in the FD rate (assuming it increases).

Fixed Deposit Pay-out Options:

Following are the different kinds of fixed deposit pay-out options:

Monthly Interest Payout - Individuals have the option to have the interest amount credited to their account on a monthly basis. The drawback in this kind of pay-out is that since banks calculate interest on a quarterly basis, choosing a monthly interest pay-out means the yield at the end of the tenure period will be lower.

Quarterly Interest Payout - Interest can be paid out quarterly, and it is a good option to earn a regular fixed income from the amount deposited.

Re-investment of Interest - If your primary goal is the growth of your money rather than a periodic quarterly income, then you can choose this compounding option. In this scheme, the bank will re-invest the interest accrued in your FD, thereby increasing the principal amount. The total amount, including the interest accrued, is paid out at the time of maturity.

Loans against Fixed Deposit

Having a fixed deposit account also allows you to avail a loan from the bank. You can avail a loan in the form of an overdraft against your deposited amount. Banks also offer this overdraft option to customers who wish to make a premature withdrawal from their FD account. Moreover, the loan approval process becomes smoother and quicker if you are an existing customer with the bank.

A loan against FD is also an excellent option for those looking to avail of funds at a lower interest rate. It is a more viable option when compared to a personal loan, which is one of the most expensive loans to take, with interest rates that could stretch to more than 20%. Moreover, the money deposited in the FD will continue to earn interest on the deposit even though there is a loan secured against it.

The loan amount approved depends on the amount you have deposited in your FD account. In general, most banks offer loans for between 70%-90% of the deposit amount. The interest rate charged on the loan is usually relatively low, once again subject to the bank’s policy, but typically, it is a little above the interest rate paid by the bank on the fixed deposit.

Credit Card against Fixed Deposit

It is possible to obtain a credit card against a fixed deposit. The bank holds the money you place in your fixed deposit account as collateral when issuing this type of card. If you have poor credit or no credit history at all, banks are unwilling to issue you a credit card as they perceive you as a high-risk customer. However, with an FD as security, banks can use your deposit to recover their dues in case of default. Since the FD acts as collateral, even those with poor credit or no credit history at all can qualify for a secured credit card.

The credit limit on a secured credit card is related to the amount deposited and could be up to 80% of the FD amount. A secured credit card is exactly like a regular credit card except that you need to have a fixed deposit to cover any potential default on repayments.

If you need to build credit history, or improve and manage your credit score, then it is advisable to use an FD to obtain a secured credit card.

Premature and Partial Withdrawal

Breaking a fixed deposit before the maturity date may be necessary if you urgently require the funds in case of a medical emergency.

In such cases the bank - on request from the depositor - will allow withdrawal of the deposit before completion of the period of the deposit. This is subject to the terms agreed upon at the time of placing the deposit. For such premature partial withdrawals, the bank will charge a penalty.

Closure of a Fixed Deposit Account

If an FD account is closed before the original intended tenure of the deposit, interest is paid for the period for which the deposit remained with the bank at the rate applicable on the date of deposit. Closing an FD account before maturity will incur a premature-closure penalty as well.

Sweep in/out Facility or Auto-Sweep Facility

While opening a fixed deposit account, you can opt for the auto-sweep facility, wherein a savings account is linked to the FD account in order to maximise returns on the available balance in the savings account. This kind of account is also known as auto-sweep account or multi-option deposit account. The main feature of this facility is that it gives you the flexibility and benefit of a savings account with the enhanced returns or interest of a fixed deposit account.

If you opt for this facility, then you need to open a savings account with the same bank or link your existing savings account with the FD account you have opened. Once you have done this, you have to specify the desired threshold of your savings account. Anything above the threshold limit gets automatically ‘swept out’ to the fixed deposit account, so that the surplus funds from your savings account earn the more attractive fixed deposit interest rates. The main advantage of this facility is that you can withdraw funds at any time from your savings account and if the balance goes below the threshold limit, funds get ’re-swept’ to the savings account from the fixed deposit account.

Fixed Deposit Rate – Frequently Asked Questions

1. Can I get a loan or credit card against my FD account?

Yes, you can get a secured credit card or a loan against your FD account. The limit on the credit card would be up to 80% of the fixed deposit amount.

2. What is sweep-in facility?

When you opt for this facility while opening an FD account, your savings account will be automatically linked to your FD. When there is an excess of amount in your savings account, it automatically gets added to the FD for a period of 1 year to earn higher interest rate than a savings account.

3. What is the maximum tax benefit I can avail through tax saver FD?

You can claim tax deduction for up to Rs.1.5 Lakhs under 80C of the Income Tax Act.

4. Can I withdraw the FD before the maturity date?

Yes, you can withdraw the FD amount prematurely. However, a percentage of fee will be levied as penalty.

5. Can I re-invest the matured FD amount after the completion of the tenure?

Most of the banks have re-investment option and you can extend the tenure or re-invest the principal and interest amount to earn higher returns.

News

Small Banks offer FD rates above 9% for senior citizens6 Dec 2019

In a bid to woo more customers, small finance banks such as Suryoday, Utkarsh, Fincare and Jana offer higher interest rates on Fixed Deposit schemes for senior citizens. The senior citizens usually get 0.50% basis points over the normal interest rate...

Read more

In a bid to woo more customers, small finance banks such as Suryoday, Utkarsh, Fincare and Jana offer higher interest rates on Fixed Deposit schemes for senior citizens. The senior citizens usually get 0.50% basis points over the normal interest rates on FD schemes. The rates offered by the top lenders such as SBI, Axis Bank, ICICI Bank and HDFC Bank range between 6.75% and 7.75%. Competing with the top banks, small finance banks have started granting higher rates on FD for senior citizens ranging between 4.5% and 9.5%.

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