Fixed deposits or FDs are a preferred investment option for most of the people in India. But, what is a fixed deposit? Here is everything you must know about it.
A bank fixed deposit is also known as a term deposit, which earns better interest as compared to the interest that the account balance earns in a savings bank account. This is a type of financial instrument in which, a certain sum of money is placed with the bank for a specified time period at a fixed interest rate.
The interest rates offered by banks on such deposits depend on the number of days, weeks or months, for which the deposit is maintained. There is great flexibility in the maturity period, which ranges from seven days to 10 years. The interest is higher in the case of a longer maturity period and can be compounded quarterly, half-yearly or annually. However, it varies across banks. The main draw for such deposits is the guaranteed interest that deposits earn.
Features of bank fixed deposits
2) Entry age
6) Account holding categories
8) Exit option
Investment objective and risks
Suitability and alternatives
Aspects of bank fixed deposits
1) Capital and inflation protection
The capital in a bank is fully protected up to Rs 5 lakh by the Deposit Insurance and Credit Guarantee Scheme of India.
The deposit is not inflation protected, which means whenever inflation is above the deposit interest rate, the deposit earns no real returns. However, when the interest rate is higher than the inflation rate, it does manage a positive real rate of return.
The interest rate is fixed and guaranteed for the duration of the deposit at the commencement of the deposit.
The fixed deposit has a lock-in period but allows withdrawals on the payment of a penalty.
4) Tax implications
A special type of deposit with a maturity period of five years in a scheduled bank is eligible for tax deduction under Section 80C. However, the interest earned on all types of fixed deposits is considered as an income from other sources when computing income tax except for senior citizens who are eligible to take a deduction of interest earned from bank deposits for maximum Rs 50,000. Effective from FY 2019-20, tax is deducted at the source on the interest income of above Rs 40,000 at a rate of 10 per cent. For senior citizens, TDS is applicable on the interest income of above Rs 50,000.
Various types of bank fixed deposits
1) Fixed deposit
In this type of deposit, both the tenure and the interest rate for the tenure are fixed.
2) Tax-saver fixed deposit
These deposits with a five-year lock-in period are tax deductible under Section 80C.
Where to open a deposit
You can open a deposit at any nationalised, private sector or foreign bank.
How to open a deposit
How to operate a deposit
To view the current rates on the schemes, go to vro.in/s34211