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Fixed Deposit Account [FD] In India

Fixed Deposit or FD is perhaps the most popular saving and investment choice among all of us. There are a few things we need to know to get the best returns from FD. Fixed deposits are the best instruments to park unexpected gains for the short term. I think FD is an important and easy way to park funds so I began digging out and here are my findings.

*Here we are discussing the Fixed Deposit accounts in banks.

What is a Fixed Deposit account?

 Fixed Deposit or FD is keeping a fixed amount in a bank account, for a fixed period and with a fixed rate of interest hence the name. A fixed deposit account is one of the significant instruments in personal finance.

What is the minimum and the maximum amount of FD?

One can open an FD with a minimum amount of just Rs. 5000. There is no limit on the upper side for the FD hence we can open FD with any amount above Rs. 5000.

You cannot deposit funds in the same FD once it is established. You need to create a separate FD each time you want to keep funds in banks under the same scheme. 

What is the minimum and maximum Lock-in period for FD?

The minimum lock-in period for which we can open an FD in a bank is 7 days. The maximum period is 10 years.

The lock-in period is also called a period of maturity. The amount in FD can be pulled back before its maturity. The premature withdrawal of funds is called breaking an FD.

What are the Interest rates for FD’s in India?

The interest rates for FD’s ranges 3 %/annum to 7.5 %/annum in general.

The interest rates for FD’s depend upon some of the factors listed below:

  1. Banks :

The interest rate varies from bank to bank. Generally, private sector banks offer better interest rates than government banks.

  1. Age: 

Senior citizens are offered more interest rates than regular operators. The interest is more by 0.25% to 1% for senior citizens.

  1. Gender:

Female account holders are offered better interest rates than male account holders in some of the banks. The difference ranges from 0.25% to 1%.

  1. Lock-in period:

The higher the lock-in period higher will be the rate of return. Thus, it is more beneficial if we keep the funds for longer periods in the FD account.

How is FD calculated?

The calculation of the FD depends on its type. The Types of FD are discussed below.

What are the types of FD account?

There are two types of FD account.  

  1. Non-cumulative
  2. Cumulative

    Non-cumulative FD:

This type of account will keep generating the fixed income on the amount deposited.

Ex. An FD with 1 Lac at the interest rate of 8%/Annum will generate Rs. 16,000 in 2 Years

This type of account is more suitable for earning a frequent income.

Formula to calculate FD:

The formula to calculate the FD is

 P * R * T/100

P ( Rs. ) – Principle or cash kept in FD

R (%/Year) – Rate of interest/year

T (Years)– Lock-in period in years

  1. Cumulative FD:

In Cumulative FD the income generated is reinvested in principle amount hence obtains higher returns than non-cumulative FD.

Ex. An FD with 1 Lac at the interest rate of 8%/Annum will generate Rs. Rs. 16640 in 2 Years.

This type of FD is more suitable for long term goals and wealth creation.

The formula to calculate the FD is

A = P*(1+r/n)^nt

I = A – P

P =( Rs. ) – Principle or cash kept in FD

r =(%/Year) – Rate of interest/year

n = number of times the interest is applied

t =number of times the period elapsed.

How many years FD will double?

There is a very simple formula to calculate how many years it will take to double our funds in FD. Just divide the number [72] by the rate of interest offered by the bank for FD to get the magic figure.

Ex. The rate of interest offered by the bank is 6 per annum. Then the number of years we need to stay invested is 72/6 = 12. Within 12 years the fund will get doubled. 

Is fixed deposit safe in India?

Funds in FD are insured by DICGC (Deposit Insurance and Credit Guarantee Corporation).

The insurance coverage for depositors in all insured banks is 5lac as per the Press Release Ni. 2019-2020/1878 dates February 4, 2020, issued by Reserve Bank of India.

This means you can get up to Rs. 5Lac back if the bank fails. Follow this link to check the Press Release:  https://www.dicgc.org.in/pdf/2019/TheIncreaseInInsuranceCoverageForDepositorsFeb2020.pdf

Can I get a monthly interest on FD?

Yes.

You can opt for periodic payouts. You can choose the frequency of payouts as monthly and pullout the interest earned on FD. 

Is FD tax-free? What is a Tax-Saving FD?

There is a special type o FD called Tax-saving FD which is tax-free under section 80C of the income tax Act. The amount invested in FD is tax-free up to 1.5lac in the financial year which is the limit for Tax saving investments.

The lock-in period for Tax- saving FD is 5 years. We can neither pull out funds prior to maturity nor we can take a loan against the Tax- saving FD. 

What is TDS?

TDS stands for Tax Deducted at Source.

The income (interest) earned on bank FD is fully taxable. The tax is deducted at the bank is called TDS.

How much amount of FD interest is tax-free?

The bank cannot deduct TDS if the interest earned from all the FD’s with a bank is less than  Rs. 40,000 in a year. The limit of income is Rs. 50,000 in a year for senior citizens.

Bank cannot deduct TDS if the individual holding the FD has an overall income less than the taxable income provided he submit Form 15G or 15H.

What is the percentage of TDS?

Banks deduct 10% of the income or the interest earned on the FD as TDS. The TDS is deducted at the time of crediting the income into your account. 

What happens if I break my FD before maturity?

There are two drawbacks of breaking FD before maturity.

  1. We are going to get less rate of interest.
  2. Penalty for breaking the FD.

Ex. Let’s consider an FD of 1,00,000 for 1 Year and the rate of interest is 7% /Year

  1. If we break the FD after completing 6 months. The bank is going to reduce the interest rate to 5% only.

So we will get an interest for 6 months on 1,00,000 at the rate of 5%.

2. The bank will deduct the penal charges from the interest earned on the principal amount. The rate of penalty ranges from 0.5% to 1%.

Now, considering the above example of FD.

a. Income or interest earned on matured FD:

 Rs. 7000( No TDS)

b. Income or interest earned after breaking FD:

Interest earned after 6 months: Rs. 2500

Penalty at 1% on 2500:Rs. 25

=2500- 25

=Rs. 2475 ( No TDS)

What things should I check before opening FD?

  1. Interest rates
  2. Lock-in period slabs.
  3. Penal Charges
  4. Frequency of interest viz. monthly, quarterly, half-yearly, and yearly.
  5. Type of FD viz. cumulative or non-cumulative.

Documents required for opening an FD?

Generally, you need to have a Saving Account with a bank to open an FD. 

The following documents are required to open an FD in a bank. 

  • Proof of age and Identity: Voter ID, PAN Card, Driving license
  • Proof of address: Adhar Card, Electricity Bill.
  • PAN card
  • Photographs

What are the benefits of FD?

  1. FD is considered one of the safest instruments of investment.
  2. FD ensures fixed returns.
  3. It is available online as well as offline.
  4. It is the most convenient option for parking funds.
  5. The rate of interest is fixed.
  6. Documents required to open an FD are easily available.
  7. One can easily borrow against FD to fulfill short-term needs.

What are the limitations of FD?

  1. The amount once invested cannot be increased within the same account.
  2. The income generated may be Taxable.
  3. Breaking an FD leads to loss of income.
  4. The rate of return is less as compared to other instruments like mutual funds, bonds, stock markets, real estate, etc.

What are the best FD accounts in India?

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One thought on “Fixed Deposit Account [FD] In India

  1. Thank you for another great post. The place else could anyone get that type of information in such a perfect way of writing? I have a presentation subsequent week, and I am on the look for such info.

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