What is a Fixed Deposit in a Bank, Know FD Meaning & Features

What is a Fixed Deposit in a Bank, Know FD Meaning & Features

Written by Sophie Robertson, In Finance, Published On
December 27, 2022
Last modified on October 12th, 2023

What is a Fixed Deposit?

A fixed Deposit is also known as a term deposit. Some call it a time deposit, but it all means the same thing. It is essentially a lump sum amount that you deposit in any bank for a set period and at a fixed rate of interest. Fixed deposits(FD) are one of the best investment plans for saving for retirement, particularly in India. Fixed deposit is also a popular means to save money. Fixed deposit rates do not fluctuate based on market rates.

On the due date, which is the date of maturity, the investor can withdraw the Fixed Deposit (FD) amount as well as the interest rate. Loans against the security of the Fixed deposit can also be granted to the investor.

If you need to withdraw the money from your fixed deposit (FD) before the end of the term then you would be penalized by the bank by 1% or 2% interest, depending on the bank. Fixed deposit (FD) is an easy method to save money in banks for a stipulated lock-in period and a fixed rate of interest

Presently banks are providing a 6 to 8% rate of interest on Fixed deposits (FD) depending on the bank. Senior citizens will be getting much higher rates of interest than normal citizens. Nowadays many Non-Banking Financial Institutions(NBFC) are also providing this facility. Tax Exemption is also given for Fixed deposits(FD) above 50,000 in 80CC.

How to calculate FD interest?

The interest on a fixed deposit may be computed using either simple interest or compound interest depending on the investor’s preference. The amount that you deposit is used to determine how much interest you will accrue according to the basic interest model.

The concept of compound interest refers to the practice of adding the interest obtained from a deposit to the initial deposit itself. After taking into account both the principal and the accrued interest, one may then proceed to compute the following interest. To put it another way, the interest you earn gets you even more interest.

Fixed deposits(FD) are extremely safe and reliable investment instruments. The principal amount and the rate of interest are guaranteed on this as it belongs to the Government of India. Fixed deposits(FD) are not subject to market fluctuations and are hence very good for investors who do not want to take the risk. It is also one of the best options for having a good retirement corpus during retirement life and it also promises financial security as the principal and the interest amount are safe.

There are different types of Fixed Deposits(FD)

  • Standard Term Fixed Deposit:- This is the normal fixed deposit where an investor can invest in a tenure of 7 days to 5 years and the rate of interest is fixed. At the end of the tenure (maturity), the principal amount and rate of interest would be given to the investor.
  • Senior Citizen Fixed Deposit:-  This is for senior citizens aged above 60 years. The FD interest rates are 0.25 to 0.5% higher which are basis points. They also get additional tax benefits
  • Tax saving Fixed Deposit:- This has a maturity period that is locked in for 5 years and the amount should be greater than 50,000 then it is tax deductible under 80CC.
  • Interest Rate: The interest rate is fixed which was decided at the time of opening the Fixed deposit account. If the fixed deposit term is longer and the amount is not withdrawn till the end, then the principal and interest will form a huge corpus account which will be very useful during retirement years to enjoy financial freedom.

You can choose for monthly pay-out, or quarterly pay-out, or can also do reinvestment that can lead to compounding benefits. The tenure is also very flexible, the money is safe and reliable, and the returns are guaranteed. The investor can also earn interest on interest.

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