1. Fixed Deposit

A Fixed Deposits, more commonly referred to as an FD, is an investment account held with the bank where the bank promises the investor to pay a fixed rate of interest for a certain time period. 

The condition to obtain the interest amount is that the money should remain with the bank for a mutually agreed period of time.



Note

1. Bank pays a fixed rate of interest.

2. Principal amount remains safe.

Features of Fixed Deposits

Fixed Deposits are a safe investment option since the investment amount i.e. the principal remains secured. The time period for which a fixed deposit is made may vary. In India, customers may choose to invest their fund for as low as 7 days to as high as 10 years.

Note

1. The rate of interest on fixed deposits varies from one bank to another. 

2. The rate of return paid by the bank on a fixed deposit depends on the time period for which the money has been fixed. 

3. The return on fixed deposit, though calculated annually, is paid monthly or quarterly.

4. The interest amount can be taken by the customer monthly, quarterly, half-yearly, annually or upon maturity of the fixed deposit.

Read also : What is Search Engine Optimization (SEO)?

Interest Calculation on Fixed Deposits

Fixed Deposit interest is calculated based on the formula provided below:

M = P (1+r/25) 4n

Where 

M = Maturity Amount

P = Deposit Amount

N = Compounded Interest Frequency

R = Rate of return

Tax on Fixed Deposits

As of March 2019, fixed deposit interests are fully taxable at the slab rate. In case the interest on all fixed deposits held by a customer in the same branch of a bank exceeds Rs 10,000 in a year, then Tax Deducted at Source (TDS) is deducted by the concerned bank. 

For senior citizens, this limit is Rs 50,000. The rate of TDS is 10% for resident Indians and 30% for Non-Resident Indians. In case the income from all sources of a resident Indian is less than Rs 2.5 lakhs per annum, then he/she can submit Form 15 G to inform the bank to not deduct TDS. In case of senior citizens, Form 15 H has to be submitted.

2. Recurring Deposit

Customers can choose to invest money in fixed deposits in two ways - as a lump sum or a fixed amount monthly. Recurring deposits are fixed deposits where customers can invest a fixed sum of money every month. The money can be debited from a savings/current bank account on a fixed date every month. Recurring deposits offer customers a chance to build up a savings corpus. It also brings a habit of investment in people. In most cases, recurring deposits can be made for a period of 6 months to 10 years.


Different types of fixed deposits in India?

In India, Fixed Deposits are a popular investment choice. In general, the following types of Fixed Deposits are offered by banks in India:

Regular Fixed Deposits: 

This is the vanilla fixed deposit where money is deposited for a fixed tenure and the bank pays a certain rate of interest. The customer has the option to choose the interval at which he/she will withdraw the return.

Read also : What is Bank and types of bank account? 

Recurring Deposits: 

In this deposit, customer deposits a fixed sum of money every month for a predetermined period of time. The bank pays a rate of interest to customers in return.

Tax Saving Fixed Deposits:

These are specialized Fixed Deposits where the principal amount gets a tax exemption. The principal amount is locked for five years. Premature withdrawal facility is not available on these kinds of deposits.

Senior Citizen Fixed Deposits: 

These Fixed Deposit schemes are for people above 60 years of age. They attract an additional rate of interest since a customer’s source of income is limited post retirement.