Introduction to Fixed Deposits: A Safe and Reliable Investment Option

When it comes to investing, Fixed Deposits (FDs) have long been considered a go-to option for many Indians. The popularity of FDs stems from their safety, guaranteed returns, higher interest rates compared to Savings Accounts, and flexibility. 

Whether you want to grow your savings or save up for a specific goal, FDs can be an excellent choice. In this article, we will provide you with a comprehensive understanding of fixed deposits. 

What is a Fixed Deposit?

A Fixed Deposit is a fixed-income investment instrument offered by banks and non-banking financial companies (NBFCs). Fixed income means you earn a fixed interest rate throughout the tenure of the deposit. FDs allows individuals to invest a certain amount of money for a fixed period at a predetermined interest rate. The interest rate on FDs is generally higher than that offered by Savings Accounts.

FDs are available for different durations, ranging from as short as 7 days to as long as 10 years. During this tenure, banks guarantee to return the invested sum along with the interest earned at the end of the maturity period.

How Do Fixed Deposits Work?

To understand how FDs work, imagine lending money to a bank or NBFC. When you invest in an FD, the institution guarantees to repay your principal amount at maturity and pays you interest on it. The bank then uses the invested money to lend to other borrowers, charging them an interest. A portion of this interest is passed on to you as the investor.

The interest rate offered on FDs depends on the duration of the investment. Shorter-duration FDs usually have lower annual interest rates compared to longer-term FDs. This is because the institution compensates for the time risk of money. Inflation erodes the value of money over time, so an investor needs to be compensated for this risk.

You have the option to choose between cumulative and non-cumulative FDs. With a cumulative FD, the interest earned is reinvested every year, and you receive a lump sum amount at maturity. On the other hand, with a non-cumulative FD, you can opt to receive regular interest payouts at fixed intervals, such as monthly, quarterly, half-yearly, or annually.

Types of Fixed Deposits

There are different types of FDs. Let’s understand each one of them.

• Regular Fixed Deposit

A regular fixed deposit comes tenure ranging from 7 days to 10 years. The interest rate varies across banks and depends on the tenure. The interest is compounded monthly, quarterly or at maturity.

• Tax Saver Fixed Deposits

Tax Saver FDs offer tax benefits under Section 80C of the Income Tax Act. Investors who have opted for the old tax regime can significantly benefit by saving on their tax outgo. However, Tax Saver FDs come with a lock-in period of 5 years, meaning you cannot withdraw amount within the stipulated period.

• Senior Citizen Fixed Deposit

Senior Citizen FDs offer higher interest rates compared to regular FDs. For instance, Ujjivan offers additional 0.50% p.a. interest for Senior Citizen FDs. However, investors aged 60 years and above are eligible to open Senior Citizen FDs.

• Digital Fixed Deposits

These are online FDs that allow investors to open an FD account from the comfort of their home. No paperwork required or branch visits required; enter your PAN and Aadhar details, make payment and complete your Video KYC top open Digital FD. However, you need to ensure that your mobile number is linked to Aadhar.

• Cumulative Fixed Deposits

Cumulative Fixed Deposits are deposits where the interest in paid out upon maturity. Such deposits are ideal for investors with a long-term investment horizon and those seeking higher returns in the long-term.

• Non-Cumulative Fixed Deposits

Non-cumulative FDs are deposits where the interest is paid out periodically – monthly, quarterly or annually. Non-cumulative FDs could be ideal for those looking for a regular income stream.

• Callable Fixed Deposits

Callable FDs are deposits that don’t come with any lock-in period. You can withdraw the amount before the maturity period. However, most banks levy a penalty fee for premature withdrawal of FD. You can read about the pros and cons of premature FD withdrawal here.

• Non-Callable FD

Non-callable FDs come with a higher interest rate and a specific lock-in period. Investors are not allowed to withdraw amount before the lock-in period. You can read about the difference between callable and non-callable FD here.

• NRO Fixed Deposits

Designed for NRIs (Non-Resident Indians), NRO (Non-resident Ordinary) FDs allow investors deposit their income earned in India in the form of rent, dividend, pension, etc. However, there are certain rules and regulations for such FDs. You can read about it here.

• NRE Fixed Deposits

NRE (Non-Resident External) FDs are designed for NRIs who wish to manage their overseas income in India. 

Interest Rate on Fixed Deposits

The interest rate on fixed deposits varies depending on the duration and the bank offering the FD. Banks and NBFCs periodically revise these rates in response to changes in economic conditions and monetary policy.

It is advisable to compare interest rates across different institutions before investing. Moreover, you should be able to calculate interest rates yourself.

Calculating Interest on FD

Fixed deposit interest can be calculated via two methods – the simple interest method and the compound interest method. Most FDs with a duration of more than a month employ compound interest method to calculate interest. In the compound interest method, the interest is calculated not only on the principal amount but on the accumulated interest as well. Basically, investors earn interest on interest, which amplifies their earnings in the long-term. You can read more about FD interest calculation here.

To calculate your FD ROI in a quick and hassle-free way, use an online Fixed Deposit ROI Calculator.  

Eligibility Criteria

You have done your homework, but now what? Well, there are certain criteria you need to fulfil to be able to invest in these deposits. These criteria include:

• Individuals
• Hindu Undivided Families (HUFs)
• Sole proprietorship firms
• Partnership firms
• Limited companies
• Trust accounts.

Anyone who satisfies the basic eligibility criteria above can invest in fixed deposits. However, you still need to have your documentation ready before investing.

Documents Required

Investing in an FD requires minimal documentation. Typically, the following documents are needed:

• Proof of identity (e.g., Aadhaar card, PAN card, passport)
• Proof of address (e.g., utility bill, rental agreement)
• Recent passport-sized photographs
• Duly filled application form

These documents help in verifying the investor's identity and address, ensuring compliance with regulatory requirements. If you have gathered all these documents, then it is time to invest in your first fixed deposit. 

Please note: With Ujjivan SFB, you can open a Digital Fixed Deposit with just PAN and Aadhar details. The OTP will be sent to your Aadhar-linked mobile number, so ensure your mobile number is linked to Aadhar. Complete your VKYC and manage your Ujjivan SFB Digital FD account seamlessly.

Why FD is Considered a Safe Investment

Fixed deposits are considered safe due to several reasons:

• Fixed Returns: The interest rate is fixed at the time of investment, ensuring predictable returns. Also, FD is not a market-linked product. During market downturns, FD investments remain unaffected.

• Regulation: FDs are regulated by the Reserve Bank of India (RBI), providing an additional layer of security.

• Insured: Bank deposits are insured up to ₹5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC), reducing the risk of loss.

These deposits may be safe, but there is a minor trade-off.

Taxation on Fixed Deposits

Fixed Deposits are one of the safest forms of investment but your earnings from such an investment are taxed. The interest earned on fixed deposits is taxable under "Income from Other Sources" at your applicable tax slab rate. 

Banks deduct TDS (tax deducted at source) at a rate of 10% (minimum) from interest earnings if the interest income exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year. Investors can submit Form 15G/15H to avoid TDS if their total income is below the taxable limit.