A fixed deposit (FD) is a financial instrument provided by banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account
The most popular form of Term deposits are Fixed Deposits, while other forms of term Deposits are Recurring Deposit and Flexi Fixed Deposits (the latter is actually a combination of Demand deposit and Fixed deposit).
Recurring deposit (RD) account
To compensate for the low liquidity, FDs offer higher rates of interest than saving accounts. The longest permissible term for FDs is 10 years. Generally, the longer the term of deposit, higher is the rate of interest but a bank may offer lower rate of interest for a longer period if it expects interest rates, at which the Central Bank of a nation lends to banks (“repo rates”), will dip in the future.[4]
Banks offer recurring deposits to Indian citizens above the age of 18 years. Customers can choose to deposit a fixed sum of money for a period of time, usually between 6 months to 10 years. Interest can be computed on simple or compound basis. At the end of the tenure, the lump sum amount can be withdrawn. Some schemes allow you to reinvest the money. You can open a recurring deposit for as little as Rs. 10 per month. The interest rates on the regular recurring deposits range between 7% to 8% per annum.
Difference between simple & Compounding Interest
For simple interest ,the interest on FDs is paid every three months or monthly as instructed by customer from the date of the deposit. The interest is credited to the customers’ Savings bank account or sent to them by cheque. This is a Simple FD. for compound interest, banks reinvest accumulated interest every 3 months in the FD account. In this case, the deposit is called the Cumulative FD or compound interest FD. For such deposits, the interest is paid with the invested amount on maturity of the deposit at the end of the term.
Can FD be prematurly withdrawn?
Although banks can refuse to repay FDs before the expiry of the deposit, they generally don’t. This is known as a premature withdrawal. In such cases, interest is paid at the rate applicable at the time of withdrawal. For example, a deposit is made for 5 years at 8%, but is withdrawn after 2 years. If the rate applicable on the date of deposit for 2 years is 5 per cent, the interest will be paid at 5 per cent. Banks also charge a penalty of 1% on principal amount for premature withdrawal of monthly interest schemes.
Banks issue a separate receipt for every FD because each deposit is treated as a distinct contract. This receipt is known as the Fixed Deposit Receipt (FDR), that has to be surrendered to the bank at the time of renewal or encashment
Automatic Renewal of FD
Many banks offer the facility of automatic renewal of FDs where the customers do give new instructions for the matured deposit. On the date of maturity, such deposits are renewed for a similar term as that of the original deposit at the rate prevailing on the date of renewal.
Income tax regulations require that FD maturity proceeds exceeding Rs 20,000 not to be paid in cash. Repayment of such and larger deposits has to be either by ” A/c payee ” crossed cheque in the name of the customer or by credit to the saving bank a/c or current a/c of the customer.
Nowadays, banks gives the facility of Flexi or sweep in FD, where in you can withdraw your money through ATM, through cheque or through funds transfer from your FD account. In such case, whatever interest is accrued on the amount you have withdrawn will be credited to your savings account (the account that has been linked to your FD) and the balance amount will automatically be converted in your new FD. This system helps you in getting your funds from your FD account at the times of emergency without wasting your time.
Loans Against FD
Customers can avail loans against FDs up to 80 to 90 per cent of the value of deposits. The rate of interest on the loan could be 1 to 2 per cent over the rate offered on the deposit and.[8]
Resident of India can open these accounts for a minimum 3 months.
Tax on FD
Tax is deducted by the banks on FDs if interest paid to a customer at any bank exceeds Rs. 10,000 in a financial year. This is applicable to both interest payable or reinvested per customer. This is called Tax deducted at Source and is presently fixed at 20% of the interest. With CBS banks can tally FD holding of a customer across various branches and TDS is applied if interest exceeds Rs 10,000. Banks issue Form 16 A every quarter to the customer, as a receipt for Tax Deducted at Source.[9]
However, tax on interest from fixed deposits is not 10%; it is applicable at the rate of tax slab of the deposit holder. If any tax on Fixed Deposit interest is due after TDS, the holder is expected to declare it in Income Tax returns and pay it by himself.
If the total income for a year does not fall within the overall taxable limits, customers can submit a Form 15 G (below 60 years of age) or Form 15 H (above 60 years of age) to the bank when starting the FD and at the start of every financial year to avoid TDS.
How bank FD rates of interest vary with Central Bank policy
In certain macroeconomic conditions (particularly during periods of high inflation) a Central Bank adopts a tight monetary policy, that is, it hikes the interest rates at which it lends to banks (“repo rates”). Under such conditions, banks also hike both their lending (i.e. loan) as well as deposit (FD) rates. Under such conditions of high FD rates, FDs become an attractive investment avenue as they offer good returns and are almost completely secure with no risk.
