What Is a Fixed Deposit?
A fixed deposit (FD) is an investment option offered by banks and non-banking financial corporations (NBFC) to their customers. Individuals invest a predetermined sum of money for a predetermined period of time at a predetermined rate of interest in an FD. The interest rate varies from institution to institution but is typically higher than the interest paid on savings accounts.
There are many terms for fixed deposits, ranging from very short-term terms of 7-14 days to long-term terms of 10 years. A term deposit is another name for a fixed deposit.
Then, how does this system function?
Essentially, you lock up your money (principal) for a specified period of time (tenure). Cumulative interest is accrued on this principal amount over the term. It is added to the principal balance at predetermined times. After the defined time (at maturity), the principal amount plus accrued interest is returned to the investor. Investors may be required to pay a penalty if funds are withdrawn before maturity. The duration of fixed deposits might range between seven days and ten years (20 years in some cases). The interest rate varies between institutions.
You can open a fixed deposit with a bank where you already have a savings account. Nonetheless, banks permit the opening of fixed deposit accounts without a savings account. As part of a Know Your Customer (KYC) procedure, you must produce pertinent documents such as proof of identity and residence, as well as pictures.
Benefits of FD
There are several benefits to investing in fixed deposits, some of which are described below:
- FDs are one of the safest investment options accessible on the market, relative to other investment options. This investment product provides a set rate of interest that does not fluctuate with market conditions for the predetermined term.
- The user of an FD obtains a fixed interest rate on the amount deposited. On bank websites, fixed deposit interest calculators allow users to calculate the amount of interest they will earn at maturity.
- With a savings account, you can invest in fixed deposits by visiting a bank branch or investing online with minimal effort. After the maturity date of the FD, the funds can be renewed or deposited into the account.
- Customers can reinvest the matured FD amount for the term of their choosing and earn compound interest. Compound interest, in this instance, indicates that you will earn interest not only on the principal amount but also on the interest gained.
- When a fixed deposit account expires, consumers can direct banks to credit the amount or reinvest it for another predetermined term.
- Banks provide consumers the option to determine the duration of their fixed deposits. Multiple banks provide terms ranging from seven days to ten years.
- A huge number of banks and NBFCs in India offer customers tax-saving fixed deposit options, thereby reducing the amount of tax that must be paid.
- Loan against FDs – Rather than taking out an unsecured loan and incurring a higher interest rate, a person might finance himself using the fixed deposit amount.
Limitations of Fixed Deposit
Despite their obvious advantages, fixed deposits are subject to certain restrictions. Among these restrictions are the following:
- Fixed interest income: The interest rate on fixed deposits is not adjusted to reflect inflationary conditions, making fixed deposit investments unattractive for investors attempting to outpace inflation.
- Penalties for withdrawals made early: The primary amount of the deposit is fixed for the duration of the deposit. Any withdrawal made prematurely is subject to penalties and extra fees.
- Lock-in: In the case of tax-saving FDs you cannot withdraw your investment from them prematurely. Investing in tax-saving fixed deposits for a period of 5 years is mandatory to take advantage of tax deduction under section 80c of the IT Act, 1961.
Who Should Invest In Fixed deposits?
If an investor prefers to invest in a low-risk investment vehicle, fixed deposits are the perfect option. The investors are aware of the returns on fixed deposits beforehand. Consequently, market movements do not affect the returns of fixed deposits.
Numerous market-linked instruments with higher returns are available for investors. However, they carry substantial market risks. To achieve balanced economic expansion, investors must also examine safe investment possibilities. Therefore, fixed deposits are secure investments with assured returns if issued by reputable financial institutions.
One of the highest returns is provided by Bajaj FD interest rate of up to 7.5% P.A. To find FDs offered by Bajaj Finance Ltd, (click here)
How To Invest In FD Through Kuvera App?
Kuvera is one of the best-fixed deposit and mutual fund investment app, kindly follow the steps below and start investing!
Step 1: Download the Kuvera Fixed Deposit App or visit our website kuvera.in and sign up.
Step 2: Complete your KYC with PAN, Aadhaar, and In-person verification through video.
Step 3: Select the ‘Invest’ option from “Home”
Step 4: Select ‘Fixed Deposits’
Step 5: You will see a list of multiple fixed Deposit options on Kuvera, sorted by tenure, bank, NBFC, etc. Click on any FD to check its tenure, interest rate, and minimum deposit required. To be sure, check the lock-in period of the fixed deposit.
Step 6: Select the fixed deposit you want to invest in, and tap on “Start FD”.
Step 6: You will be asked to provide your primary bank account details – IFSC code, account number, and account type.
You are ready to go!
1. How much tax is deducted on FDs?
If your FD interest surpasses Rs. 10,000 in a given fiscal year and you have provided your PAN number, the bank will deduct 10% TDS. TDS is deducted at the rate of 20% if you have not given your PAN information.
2. How much amount is insured on FDs?
The sole risk associated with fixed deposit investments is the possibility of banking collapse or default. For such extreme circumstances, each depositor is covered up to 5 lacs (for both principal and interest) if you have opened your fixed deposit account with a scheduled commercial bank. If you have numerous fixed deposits with multiple banks, the deposit insurance coverage limit is applied to each bank separately.
3. Can you save tax on FDs?
You can take advantage of Section 80C of the IT Act, 1961’s income tax exemption by opening a tax-saving FD. The income tax exemption for fixed deposits can be claimed for investments up to Rs. 1.5 lakh. The Lock-in period of such FDs is 5 years.