Fixed Deposits, popularly known as FDs, are one of the most popular investment avenues in India. They are fixed income instruments that require you to invest a lumpsum amount for a certain period to earn a fixed return. They best suit individuals who have zero tolerance towards risk and want to earn fixed returns. The banks and financial institutions offer several different kinds of FDs, and this article will explain each of them in detail.
Types of Fixed Deposits
Cumulative Fixed Deposits
Cumulative fixed deposits are similar to traditional fixed deposits that pay the interest upon maturity. However, the interest earned on this deposit is added to the principal. This means the interest is reinvested, and you earn interest on interest. Since the interest is compounded, it best suits investors with a long term investment horizon, and does not need a regular source of income.
Non-Cumulative Fixed Deposits
Non-cumulative fixed deposits help create an additional source of income by offering regular interest. When you invest in such FDs, you can choose the interest payout frequency from monthly, quarterly, half-yearly, or annually. The bank will pay you the interest during these intervals, which you can use to pay your bills. This type of FD is best suited for individuals who are looking for an additional source of income to meet their regular or recurring expenses.
Standard Fixed Deposit
A standard fixed deposit is the most popular type of FD. It is offered by every bank and financial institution and has a flexible tenure ranging from 7 days to 10 years. The minimum investment is also quite low, making it affordable to all kinds of investors. The interest rate of this FD is higher than that of a savings account, and it is different for different tenures. It offers premature withdrawal with a penalty and an overdraft facility in case of emergency. This type of FD suits investors who are looking to earn fixed returns from their investments for a short or long-term horizon.
Flexi Fixed Deposit
A fixed deposit that offers the benefits of an FD and savings account is a flexi fixed deposit. Under this scheme, you can set a threshold limit for your savings account. Whenever there is excess money in the savings account, it will get transferred to your FD account, and you can earn a higher interest on the excess money. In case, the savings account is falling short of funds, then the money in your FD account will be transferred to your savings account.
Therefore, a flexi FD offers the benefit of high interest from investment and liquidity of savings accounts. This type of FD best suits investors who are working as freelancers or are self-employed. When they have excess funds, they can earn higher interest on them, and when they are falling short of funds, they can withdraw money without breaking the FD.
Special Fixed Deposit
Special fixed deposits are available only for certain or ‘special’ tenures, such as 290 days or 380 days. They pay a higher interest than standard FDs and have a fixed lock-in period. This means you cannot withdraw the investment before the tenure ends. This type of FD suits investors who have specific duration goals and do not require money for a certain period of time.
Tax Saving Fixed Deposit
A tax saving fixed deposit is an FD investment scheme that gives tax benefits to investors upon investments. You can avail of tax benefits of up to Rs 1.5 lakhs per annum under Section 80C of the Income Tax Act, 1961, by investing in them. They have a fixed tenure of five years, and the interest rate is similar to the standard FD of similar tenure. The FD doesn’t allow premature withdrawals, and hence, you cannot prematurely withdraw your investment. This FD best suits investors who want to invest and save taxes.
Post Office Fixed Deposit
The post office offers an FD scheme known as post office time deposit. It is an FD scheme that has a fixed tenure of one, two, three and five years and the interest rate for these tenures is fixed by the Ministry of Finance. The interest is paid annually, but in case you do not want to earn regular income then you can instruct the post office to redirect the interest to a post office savings account or post office recurring deposit account. You can invest in this FD either through the post office or any of the authorized banks such as SBI, ICICI, or HDFC Bank. This FD best suits investors who want to invest in government backed investments and earn a risk-free return.
Floating Rate Fixed Deposit
A floating rate fixed deposit, as the name suggests, has a floating interest rate. The interest rate is not fixed throughout the tenure and keeps changing with changes in the reference interest rate. The reference interest rate is usually the RBI repo rate or treasury bill yield. This means if the repo rate increases, then the FD interest rate also increases automatically without auto-renewing or closing the FD. The primary benefit of this FD is that it protects the returns from inflation. This best suits investors who invest for a long tenure and want to earn inflation beating returns.
Corporate Fixed Deposit
Fixed deposits offered by Housing Finance Companies (HFCs) and Non-Banking Financial Companies (NBFCs) are an alternative to traditional bank FDs. Generally, corporate FDs have higher interest rates compared to bank FDs. It’s important to note that, unlike bank FDs, corporate FDs are not covered under the insurance protection provided by the Deposit Insurance and Credit Guarantee Corporation (DICGC). Hence, if you are opting for corporate FDs, you should carefully consider the credit ratings assigned to the FD by rating agencies like CRISIL, CARE, ICRA, etc.
Non Resident External (NRE) Fixed Deposit
An NRE account is a bank account for NRIs denominated in foreign currency. NRIs transfer their foreign income to India and manage it through the NRE account.
The NRE FD is a deposit account for NRIs to invest their foreign currency into an Indian account. Denominated in Indian rupees, the NRE account offers complete tax exemption. NRIs, Persons of Indian Origin (PIOs), and Overseas Citizens of India (OCIs) can invest in NRE deposits through NRO and NRE accounts.
The tenure for NRE FDs typically ranges from 1 year to 10 years. Additionally, both the investment and the interest earned are entirely tax-free in India. NRE FDs up to Rs 5,00,000 are covered under DICGC insurance.
Non Resident Ordinary (NRO) Fixed Deposit
An NRO account is a bank account for NRIs denominated in Indian Rupee. NRIs can manage their income in India through an NRO account. To open an NRO FD, NRIs must have an NRO Account.
NRO FDs are a low-risk investment option with guaranteed returns in the form of interest. The interest rates vary among different banks, and the interest earned is subject to taxation in India. While the principal amount cannot be repatriated, the interest can be transferred to a foreign account.
Funds used to open an NRO FD must originate from India, although transfers from an NRE account to an NRO account can facilitate investment in an NRO FD. Withdrawals from NRO FDs are only permitted in Indian currency, and the tenure typically ranges from 7 days to 10 years. Many banks offer features such as nomination, auto-renewal, and the option for NRIs to obtain loans against their NRO FDs.
Foreign Currency Non-Resident (FCNR) Fixed Deposit
The FCNR FD allows NRIs to invest their foreign earnings in India. It facilitates the transfer of overseas earnings in foreign currency. Deposits are held for a predetermined period, during which a fixed interest rate is accrued. However, FCNR accounts only accept deposits in select foreign currencies.
FCNR accounts serve as an attractive option for NRIs to attract foreign remittances. The interest rates offered depend on the currency type and the bank. Additionally, maintaining the account in foreign currency mitigates the risk of currency conversion fluctuations, enabling NRIs to earn a fixed interest rate typically higher than that available in their country of residence.
The tenure of FCNR (B) accounts typically ranges from 1 year to 5 years. Both the deposit and interest amounts in this account are fully repatriable. Furthermore, interest earned on deposits in this account is exempt from taxation in India.
Resident Foreign Currency (RFC) Fixed Deposit
The RFC FD allows NRIs and PIOs returning to India after residing abroad for at least a year to deposit their foreign currency earnings from overseas and earn returns without exposure to exchange rate fluctuations. These deposits can be utilized for legitimate remittances abroad without requiring prior approval. The interest rate provided on an RFC deposit account varies based on factors such as currency type, deposit amount, tenure, and the bank.
Conclusion
Although various investment avenues exist, fixed deposits continue to be the most secure option, providing assured returns on investments.
With numerous types of fixed deposit options available, selecting the one that aligns best with your needs is crucial. You can evaluate your options and forecast potential earnings utilizing an FD calculator.
Frequently Asked Questions (FAQs)
What is the maximum deposit amount in a fixed deposit?
Fixed deposits do not have a maximum deposit limit.
Can I link my savings account with FD?
Yes, with flexi fixed deposits, you can link your savings account to your bank account.
Is there any special interest rate for Senior Citizens on Fixed Deposits?
Most banks typically offer higher interest rates for senior citizens, up to 0.50%. However, the preferential rate is subject to change at the discretion of the bank.
Is FD tax-free?
Not all FDs are tax-free, but tax-saving FDs qualify for tax exemption under Section 80C. Investments up to Rs 1.5 lakhs per annum qualify for the tax deduction.
How many FDs can a person have?
There is no limit on the number of FDs you can open.
Do FDs have TDS?
Yes, Tax Deducted at Source (TDS) on FD is deducted at a rate of 10% if the total interest earned in a financial year is more than Rs. 40,000. However, in cases where the investor’s PAN is not available, TDS is deducted at a higher rate of 20%.
