What is Fixed Deposit Account and its Types, Benefits and Features

What is Fixed Deposit Account?

A Fixed Deposit (FD) Account is a financial instrument offered by banks and non-banking financial companies (NBFCs) in India where you deposit a lump sum of money for a predetermined period at a fixed rate of interest. Unlike a regular savings account where interest rates may fluctuate and deposits can be withdrawn at any time, a Fixed Deposit locks in your funds for a specific tenure ranging from a few months to several years and provides a guaranteed return.

When you open an FD, you agree to keep your money deposited for the chosen tenure, and in return, the bank promises to pay you interest at the agreed-upon rate. At the end of the tenure (known as maturity), you receive your principal amount along with the accumulated interest. This combination of safety, predictable returns, and flexibility in tenure makes Fixed Deposits one of the most popular investment options for risk-averse savers in India.

Benefits of Fixed Deposit Account

• Guaranteed Returns: One of the primary advantages of an FD Account is the certainty of returns. Unlike market-linked instruments (such as stocks or mutual funds), the interest rate on an FD is fixed at the time of opening. This means you know exactly how much you will earn over the deposit period, helping you plan your finances with greater confidence.
• Higher Interest Rates Compared to Savings Accounts: Banks and NBFCs typically offer higher interest rates on Fixed Deposits than on regular savings accounts. Depending on the tenure and the institution, FD rates can be significantly more attractive, especially for longer tenures or for special categories such as senior citizens.
• Flexibility in Tenure: Fixed Deposits come with a wide range of tenure options, starting from as short as seven days to as long as ten years (and sometimes more). This flexibility allows you to choose a tenure that aligns with your financial goals whether you need short-term parking of funds or are looking for a long-term, stable investment.
• Loan Against FD Facility: If you need funds before your FD matures, many banks permit you to take a loan against your FD at a nominal interest rate. This is often cheaper than personal loans or credit card loans because your FD serves as collateral. The bank may grant up to 90–95% of the FD’s value as a loan without having to break the deposit.
• Tax Benefits (for Specific FD Schemes): Certain types of Fixed Deposits, such as tax-saving FDs, qualify for tax deductions under Section 80C of the Income Tax Act, up to a limit of ₹1.5 lakh per financial year. These FDs generally come with a lock-in period of five years, so you benefit both from higher returns and tax savings.
• Safety and Peace of Mind: Fixed Deposits with scheduled commercial banks in India are secured up to ₹5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC). This insurance covers both principal and interest, providing an extra layer of security if the bank faces financial difficulties.

Features of Fixed Deposit Account

Fixed Interest Rate:

The interest rate on an FD is determined at the time you open the account and remains constant throughout the tenure. Rates vary from bank to bank and may also depend on factors like tenure, deposit amount, and the depositor’s category (e.g., senior citizen).

Minimum Deposit Amount:

Most banks allow you to open a Fixed Deposit with a relatively small sum, often as low as ₹1,000 or ₹5,000, depending on the bank’s policy. This low entry barrier makes FDs accessible to a wide range of savers.

Premature Withdrawal:

While the primary advantage of an FD is that it locks in your funds, most banks permit premature withdrawals if you need urgent cash. However, breaking an FD before maturity typically attracts a penalty commonly a reduction in the applicable interest rate by 0.5% to 1% and may also involve a processing fee.

Auto-Renewal Option:

Many banks offer an auto-renewal feature. If you do not instruct the bank to pay out your FD on the maturity date, it will automatically renew the principal amount for the same tenure at the prevailing interest rate. You can also choose only to auto-renew the principal and receive the interest payout at maturity.

Nomination Facility:

When opening an FD, you can nominate a person who will receive the proceeds of the FD in the event of your demise. This feature ensures a smooth transfer of funds to your family or beneficiaries without legal hassles.

Interest Payout Options:

Banks offer flexibility regarding how you receive your interest. Common options include:

• Cumulative FD: Interest accrues and is paid only at maturity along with the principal.
• Non-Cumulative FD: Interest is paid out periodically (monthly, quarterly, half-yearly, or annually) based on the option you choose at the time of opening the FD.

Types of Fixed Deposit Account in India

Regular Fixed Deposit:

This is the most common type. You deposit a lump sum for a chosen tenure, and the interest (cumulative or periodic) is determined based on the bank’s prevailing rates. Suitable for individuals, businesses, and institutions looking for safe and predictable returns.

Tax-Saving Fixed Deposit:

Under Section 80C of the Income Tax Act, you can invest up to ₹1.5 lakh per financial year in a tax-saving FD and claim a deduction. These FDs have a mandatory lock-in period of five years. Interest on tax-saving FDs is fully taxable, and premature withdrawals are not permitted.

Senior Citizen FD:

Banks offer higher interest rates typically 0.25% to 0.5% more on FDs opened by individuals aged 60 years and above. The features are like regular FDs, but the preferential rate makes it a favored choice for retirees and older investors.

Cumulative vs. Non-Cumulative FD:

• Cumulative FD: Interest compounds and is paid along with the principal at maturity. Ideal for those who do not need periodic income and want higher compounded returns.
• Non-Cumulative FD: Interest is paid out at regular intervals (monthly, quarterly, etc.). Suitable for individuals looking for a steady income stream, such as retirees or salaried professionals.

NRI (Non-Resident Indian) FDs:

• NRE (Non-Resident External) FD: Permits NRIs to deposit foreign earnings in India. Both principal and interest are fully repatriable (free to transfer abroad).
• NRO (Non-Resident Ordinary) FD: Allows NRIs to deposit income earned in India (e.g., rent, dividends). Principal is not repatriable beyond certain limits, and interest is taxable in India.
• FCNR (Foreign Currency Non-Resident) FD: Offered in foreign currencies (USD, GBP, EUR, etc.) to NRIs. Protects against currency fluctuations, as both principal and interest are repatriable.

Corporate Fixed Deposit:

Certain NBFCs and corporate entities offer FDs with higher interest rates to attract investors. These are not covered by DICGC insurance, so the risk may be higher than bank FDs. Corporate FDs usually come with higher minimum deposit requirements and may offer special tenures or schemes.

How Does Fixed Deposit Account Work?

Opening the FD:

To open a Fixed Deposit Account, you select a bank or NBFC, choose a deposit amount, and decide on a tenure (for example, 1 year, 2 years, or 5 years). You also select whether you want a cumulative or non-cumulative interest payout. The bank then fixes the interest rate based on current market conditions and your chosen tenure.

Deposit and Interest Accrual:

Once the FD is opened, your deposit amount is locked in for the chosen tenure. The bank calculates interest on this principal daily or quarterly, depending on its policy. For cumulative FDs, interest compounds quarterly or monthly, leading to higher effective returns over time.

Interest Payout Options:

• Cumulative: Interest keeps compounding and is paid out only at maturity. This maximizes returns for those who do not need liquidity before maturity.
• Non-Cumulative: You receive periodic interest payouts. For instance, if you choose a quarterly payout, the bank will credit interest to your savings or current account every three months. This option provides regular income streams.

Premature Withdrawal and Penalties:

If you need to withdraw your FD before it matures, you can submit a premature withdrawal request. The bank will break the FD and return the principal along with interest calculated at a lower penal rate. Typically, the interest rate used for premature withdrawal is the rate originally offered for the period the FD remained active, minus a penalty (often 0.5%-1%).

Maturity and Renewal:

At the end of the tenure, the FD matures, and the bank pays you the principal plus interest (for cumulative FDs) or stops interest payouts (for non-cumulative FDs). You can instruct the bank to either:

• Withdraw: Receive the entire maturity amount into your savings/current account.
• Renew: Automatically renew the FD for the same tenure at the prevailing interest rate. Some banks allow you to renew only the principal and receive the interest if you had chosen cumulative mode in the previous FD.

Tax Implications:

Interest earned on Fixed Deposits is taxable as per your income tax slab rate. Banks deduct Tax Deducted at Source (TDS) at 10% if the interest payout in a financial year exceeds ₹40,000 (₹50,000 for senior citizens). If your total income is below the taxable limit, you can submit Form 15G/15H to avoid TDS.

List of Documents Required to Open Fixed Deposit Account in India

To open a Fixed Deposit Account in India, you must complete the Know Your Customer (KYC) process and provide necessary documentation. While specific requirements may vary slightly between banks, the following list covers the essential documents:

Proof of Identity (POI):

• Aadhaar Card (Indian resident UID)
• PAN Card (Permanent Account Number)
• Passport
• Voter ID Card (Election Commission of India)
• Driver’s License
• Government-issued ID Card (for Indian nationals)

Proof of Address (POA):

• Aadhaar Card (if not used as POI)
• Passport (if not used as POI)
• Voter ID Card (if not used as POI)
• Driver’s License (if not used as POI)
• Utility Bills (electricity, water, gas) not older than three months
• Bank Statement or Passbook with address not older than three months
• Rental Agreement (along with a copy of the landlord’s identity proof)

Proof of Date of Birth (if not provided under POI):

• Birth Certificate
• School/College Leaving Certificate
• Passport (if not used for POI)
• Driver’s License (if not used for POI)

Recent Passport-Sized Photographs:

Two to three recent color photographs (as per bank’s specifications).

PAN Card:

Mandatory for any single deposit or total deposits exceeding ₹50,000 in a financial year to comply with income tax regulations.

Application Form:

Duly filled FD application form provided by the bank. This form typically asks for basic details such as name, address, PAN, deposit amount, tenure, interest payout preference, and nominee details.

Cheque or Demand Draft:

A cheque drawn on your savings or current account with the same bank (or another bank, as per deposit rules) for the FD amount. If you are depositing cash beyond ₹50,000, banks usually require verification and may ask for a cash deposit form.

Nomination Form (Optional but Recommended):

To nominate a beneficiary who will claim the FD proceeds in case of the depositor’s demise.

Additional Documents for NRIs (if applicable):

• Passport copy
• Overseas Address Proof (utility bill, bank statement, or residency certificate)
• NRE/NRO Account Proof (if you are depositing through your NRE or NRO account)
• PAN Card or Form 60/61 (if NRI does not have a PAN)

Once the bank verifies your documents and processes the application, you will receive an FD receipt or certificate. This serves as proof of your Fixed Deposit and contains details such as FD number, deposit amount, tenure, rate of interest, maturity date, and nominee information.