Types of Fixed Deposit (FD)

A fixed deposit scheme is one wherein you deposit a lump sum amount for a fixed tenure and at a fixed interest rate. After the term ends, you get a lump sum amount.

For instance, you deposit Rs.15,000 for three years at 7.65% per annum. After three years, you would get a lump sum of Rs.18,713.

In India, you can choose to invest in various types of fixed deposits. Here’s a look at some of the most popular types of FDs that you can choose from –

• Standard Fixed Deposits
  Standard fixed deposits are the traditional deposit schemes banks and post offices offer. You can invest a fixed amount of money for a fixed term. The bank or post office guarantees the rate of interest. After the tenure ends, you get the amount invested and the interest earned in a lump sum.
• Tax-saving Fixed Deposits
  As the name suggests, tax-saving fixed deposits are deposit schemes that help you save taxes. These deposit schemes come with a fixed term of 5 years.
  Your investment into the deposit is a deduction from your taxable income. You can claim a maximum deduction of Rs.1.5 lakhs on your deposit.
  If you fall in the 30% tax bracket, this deduction helps you reduce your tax liability by Rs.45,000 (30% of Rs.1.5 lakhs).
  Moreover, as a senior citizen, you also enjoy tax benefits on the returns you earn. Returns of Rs.50,000 qualify as a deduction from your taxable income under Section 80TTB of the Income Tax Act, 1961.
• Senior Citizen Fixed Deposits
  As the name shows, senior citizen fixed deposit schemes are designed for seniors, i.e., individuals aged 60 years and above.
  The interest rates are higher on these deposits. Senior citizens also enjoy tax deductions on the interest income under Section 80TTB up to Rs.50,000.
• Flexi Fixed Deposits
  Flexi fixed deposits are deposit schemes linked to your bank savings account. The savings account has a sweep-in feature.
  You specify a minimum balance you want to maintain in your savings account. If the savings account balance exceeds the specified limit, the excess is automatically transferred to the Flexi fixed deposit account.
  For instance, you open a Flexi fixed deposit account linked to your bank savings account. You specify that the savings account balance is to be maintained at Rs.10,000 every time. In a month, your savings account balance goes up to Rs.13,000. In this case, Rs.3000 would be transferred to the Flexi fixed deposit account from the savings account.
  Further, flexi FDs’ benefits over normal fixed deposits are primarily due to their flexibility and liquidity. In a typical fixed deposit, you must deposit a specific sum for a particular period, with the amount earning fixed interest. If you wish to withdraw this amount before maturity, the financial institution will either not permit it or charge a penalty fee.
  In such scenarios, Flexi Fixed Deposits can help you overcome this problem by allowing you to withdraw certain sums of money, which could be from your savings/current account linked to your Flexi FD.
• Regular Income Fixed Deposits
  Like standard fixed deposits, regular fixed deposits are the traditional deposit schemes that pay a guaranteed interest rate on your deposit.
  Moreover, as their name states, this FD type is very beneficial for those individuals who want a steady source of income month in and month out. Therefore, with an interest payout scheme that gives you monthly returns, this scheme is by far the lowest in risk and most beneficial if you need constant cash flow.
• Corporate Fixed Deposits
  Besides banks, post offices and NBFCs (Non-Banking Financial Companies), companies can offer investors fixed deposit schemes.
  These deposits are called corporate fixed deposits since corporates offer them. The deposits usually carry a higher interest rate than bank or post office deposit schemes.

However, they are riskier since your deposit might default if the company fails to repay it on time.

While resident Indians can open a fixed deposit account, Non-Resident Indians (NRIs) can also open an account with an Indian bank.

Such deposits are beneficial for NRIs if they want to save in India. Moreover, the tax-saving deposits also allow NRIs to lower their tax liability on their income in India.

Besides NRIs, Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs) can also open these accounts.

There are two types of fixed deposit accounts that NRIs can choose from. These are as follows –

• NRO Fixed Deposits

NRO stands for Non-Resident Ordinary. NRO fixed deposits are meant for NRIs with a source of income from India. Such NRIs can open this account, which is a rupee account.

The amount deposited into the account cannot be repatriated outside India, which means that the NRI cannot remit the deposit amount to a foreign country where he resides.

The interest earned, however, is freely repatriable to any country subject to a limit specified by the Reserve Bank of India (RBI).

NRO fixed deposits have attractive interest rates, and NRIs can open these accounts jointly with a resident Indian individual. The interest income, however, is fully taxable in the hands of the NRI at the applicable tax slab rates.

Moreover, if the interest income is more than Rs.10 lakhs in any financial year, an additional surcharge of 10% would also apply to the tax liability.

• NRE Fixed Deposits

Non-resident external fixed deposits are accounts wherein the money is deposited in foreign currency. The account allows the NRI to repatriate the deposit amount freely, without limits.

While NRIs can make deposits in foreign currency, the account is denominated in INR only. The warranty is converted to INR and then held in the account.

NRIs can also choose 5-year NRE fixed deposit accounts to save taxes under Section 80C.

The interest earned from this account is tax-free in the hands of NRIs, so this account is quite popular.

You can open an FD account with any financial institution offering the same. But, first, you decide the amount you want to invest and the deposit term.

On the other hand, the financial institution determines the interest rate you can earn on your deposit. This interest rate depends on the following factors –

• Your age (senior citizens earn a higher rate of interest)
• The term of the deposit
• If you choose an auto-renewal facility
• The repo rate set by RBI

After you open the account, the interest is earned and compounded periodically. You continue making interest at regular intervals over the deposit term. Once the period ends, you get a lump sum amount on maturity.

With the different types of bank deposits available, finding the most appropriate scheme for your needs becomes challenging.

Here are some tips that would help you choose a suitable fixed deposit scheme that aligns with your investment objectives –

• Tenure

Firstly, select the term of deposit which suits your needs. For example, you can choose a long-term deposit scheme if you do not have to fulfil any financial goal in the next few years. However, if you are saving for a purchase you intend to make soon, choose a short-term deposit tenure.

Remember, fixed deposits lock in your money for the term you choose. So, ensure that the lock-in period matches the time you want to invest.

• Premature Withdrawal

Premature withdrawal means withdrawing your deposit before the chosen term ends. For instance, you open a fixed deposit account for three years but withdraw the money after two years and six months. Hence, the said withdrawal would be termed premature.

Premature withdrawals are not usually allowed. Even if allowed, you incur a penalty if you withdraw the amount before the term ends.

This penalty reduces the compelling interest that you earn from the deposit.
So, try and avoid making premature withdrawals. Choose the deposit term wisely, and stay invested for your chosen period.
 

• Rate of Interest

Banks, post offices, NBFCs, and corporations offer fixed deposits. However, the interest rates vary across each financial institution.

So, after selecting the type of FD you want to invest in, compare the interest rate on the account across different financial institutions.

Choose an institution with the highest risk-adjusted interest rate to maximise the returns earned from your fixed deposit investment.

• Additional Advantages

Check the other advantages that fixed deposits have to offer. Many deposit schemes come with additional benefits to attract investors. For instance, you might find features like – 

• The flexibility of premature withdrawals
• Higher interest rates on long-term deposits
• Additional insurance cover
• Discount on locker rentals, etc.

Choose a fixed deposit scheme with the maximum additional features to get the full benefits from your investment.

The benefits of investing in FDs are as follows:

1. Fixed Returns: Indians are generally conservative investors who want to save more than they spend from a very young age. When you are from such an upbringing, there is nothing more advantageous than having fixed returns on your investment. Fixed deposits offer precisely that. The returns from FD are from the interest it generates, and there are no market-linked elements, making the returns predictable.
2. Compounding: It is a phenomenon that significantly helps your investment in a fixed deposit. It is when your profit from the investment gets reinvested so that the compounded corpus will start to gain interest after that. For instance, if your investment is Rs. 1 lakh and you gained Rs. 7,500 in the first year, the compounded amount of Rs. 1,07,500 will start to gain interest from the following year.
3. Flexible: One common downside of FD may be pointed out is the lock-in period. But the same allows banks to give you the interest. But that doesn’t mean FDs are not flexible and your money is stuck. There are multiple options here, including using some banks' overdraft facility. If nothing works, you can withdraw your money by paying additional fees.
4. Sovereignty of Government of India: Each depositor in a bank is insured upto a maximum of ₹ 5,00,000 (Rupees Five Lakhs) for both principal and interest by Deposit Insurance and Credit Guarantee Corporation (DICGC), a specialised division of Reserve Bank of India. The agency insurance fixed deposits up to a limit of Rs. 5 lakh per account holder per bank. If the amount exceeds Rs. 5 lakh, including principal and accrued interest, only Rs. 5 lakh will be paid by the DICGC.

Fixed deposits can be the right choice if you want guaranteed returns on your deposits and want to save for a specified amount of time.

With the different types of fixed deposits available, you can also choose a scheme that suits your financial needs.

Understand the types of bank deposits available, use the tips mentioned above and pick the suitable fixed deposit scheme to save your hard-earned money.