Definition: A fixed-income debt security, usually issued by banks is called a Fixed Deposit (or as commonly known as FD). In simple words a FD is like loaning the bank your money on which Bank pays you interest.
The rate of interest for Bank Fixed Deposits depends on the maturity period. The tenure is fixed and the rate is guaranteed. Rate is usually higher in case of longer maturity period.
- Term of FD can range from 15days to 5 years.
- The interest can be compounded quarterly, half-yearly or annually and varies from bank to bank.
- Minimum deposit amount is Rs 1000/- and there is no upper limit.
- Loan / overdraft facility is available against bank fixed deposits.
- One can break the FD in case of emergency monetary requirement but it involves loss of interest.
What one should know before creating an FD?
Before selecting the bank for FD one should
- Check the financial position of the bank,
- Check the rates of interest for different banks for different periods.
- It is advisable to keep many small deposits instead of putting a big amount in one fixed deposit. As this will help if one needs to make any premature withdrawal of partial amount, then only one or two deposits may need to be prematurely encashed making the loss of interest minimal.
- Check deposit receipts carefully to ensure that all details have been properly and accurately filled in.
- Do not leave the renewal column unfilled. Otherwise, on maturity the fixed deposit amount will go back into an FD.
- Before investing in a FD it is important to consider the rate of interest and the inflation rate. A high inflation rate can reduce the real returns.
Advantages of investing in Fixed Deposit
- Fixed deposits are among the safest modes of investment; nationalized, private, or foreign, are governed by the RBI's rules and regulations, and give due weightage to the interest of the investor. In fact all bank deposits were insured under the Deposit Insurance & Credit Guarantee Scheme of India, which has now been made optional.
- One can get loans up to 75- 90% of the deposit amount from banks against FD receipts.
- The amount invested in fixed deposits with a maturity period of 5 years in a Scheduled bank is eligible for tax deduction under section 80C but the interest earned on the deposit is taxable.
- Tax will be deducted at the source, if the interest income on a fixed deposit per annum exceeds Rs.10000.
How To Open a Bank Fixed Deposit Account?
Some banks insist on a savings account with them to operate a FD. IT is as simple as filing a form and depositing cash with the bank and FD is made.
Eligibility & Documentation
A valid Identity proof and an address proof are required by the depositor for opening a Fixed Deposit account