How Does a Fixed Deposit Work in India?

Investments are a great way to grow your wealth. But that is not all. Your investments can help you meet short-term goals or create a contingency fund to tackle unexpected financial needs.

While there are myriad investment options, a popular one across the country is a fixed deposit. 

Fixed deposits have been a go-to option for risk-averse investors. However, the recent hike in 

FD rates have made it an attractive option for investors of all groups. The best way to make the most of your investment is to know how FD works. 

Simply put, you invest a lump sum at any financial institution for a specified tenor at a predetermined interest rate. During the tenor, your corpus accrues interest. Read on to learn what an FD is and how it works, the different types of FD, and the benefits of investing in it.

How Does a Fixed Deposit Work? 

Banks, NBFCs, and other financial institutions allow you to keep your funds with them in exchange for interest. The funds deposited, in turn, enable them to run the lending vertical of their operation.

There are many ways in which financial institutions allow you to park your funds with them. Fixed deposits are one among them. As mentioned, unlike other options, like a savings account, in a fixed deposit, you may not have access to the money before the FD maturity date. 

Nevertheless, you get complete flexibility to choose the tenor of the money invested. The lock-in period can be as low as 7 days or as high as 10 years. Keep in mind that the interest rate on your fixed deposit depends on the tenor you invest for. 

Additionally, senior citizen investors receive higher interest rates than non-senior citizen investors. The interest you earn on your fixed deposit also depends on your FD type. Broadly, there are two main types of FD: cumulative and non-cumulative.

In the former, you receive your principal amount plus the interest earned at the end of the tenor. You enjoy the benefit of compounding interest with a cumulative FD. Depending on the frequency, your principal and interest earnings go on to accrue interest at the set rate.

On the other hand, a non-cumulative FD offers the interest in periodic payments. However, you may not enjoy the benefit of interest compounding. As a result, the effective yield of this may be lower than a cumulative FD. 

Generally, in a non-cumulative FD, you can opt for a monthly, quarterly, half-annual, or annual payout option. Here is how does fixed deposit work with example:

With an investment amount of ₹3 Lakhs for a tenor of 44 months, these are your earnings:

Disclaimer: The above results are calculated with an FD calculator. The actual interest rate and earnings may vary depending on the FD issuer.

How is FD Interest Calculated?

You can calculate the total earnings and interest earned you can earn on FD using two different formulas. 

1. Simple interest:

Here, P*R*T (here, ‘P’ is the principal amount, ‘R’ is the interest rate, and ‘T’ is the tenor of the fixed deposit)

2. Compound Interest:

P+[(1+r/n)∧ t]-P (here, ‘P’ is the principal amount, ‘r’ is the interest rate, ‘n’ is the number of years, and ‘t’ is the compounding frequency)

Advantages of Fixed Deposits 

Fixed deposits come with many benefits. Some of the top advantages of an FD are:

• You get stable returns on your investment as the interest rate remains unaffected by market fluctuations. 

• You can book a fixed deposit account with just a few clicks and an easy online application process. Once you start the investment, you don’t have to monitor it until maturity.

• You can get regular income by opting for a periodic payout option on your FD.

• A fixed deposit is flexible as you can choose the tenor, investing amount, and payout option per your needs.

• If you go for a tax saver FD, you can save up to ₹1.5 Lakhs as tax exemption under Section 80C of the Income Tax Act.

• To help you manage any emergency financial need, you can take a loan against a fixed deposit without making a premature withdrawal.

• You don’t need a huge amount to start a fixed deposit investment. The minimum amount in certain banks and NBFCs to book an FD is as low as ₹1,000.

• A fixed deposit calculator helps plan your investment by comparing your earnings for different tenors of different issuers.

• NRIs can also invest their amount in a fixed deposit with NRE and NRO fixed deposits and grow their money safely.

• Senior citizen FD rates are usually higher than the rates offered to non-senior citizen investors. Higher interest rates make it the perfect investment option for senior citizens.

• FD interest rates in a fixed deposit investment are higher than in a normal savings account.

• Liquidating an FD involves a simple and easy process, which can be initiated online as well

Fixed Deposit: Types 

There are different types of fixed deposits you can opt for as per your needs. To know about how fixed deposits work, you must know its types. Apart from cumulative and non-cumulative FDs, here are a few other types of fixed deposits:

1. Tax-saving fixed deposit

A tax saver FD is where you can save up to ₹1.5 Lakhs in taxes with a one-time deposit. The money invested in this type of FD is locked for 5 years. However, the interest earnings on this type are taxable. 

To avoid tax deduction at source for interest earnings, you can submit Form 15G if you are a regular depositor. If you are a senior citizen, you can submit Form 15H.

2. Senior citizen fixed deposit

Senior citizen FD offers higher interest rates for individuals above 60 years. Usually, the interest rate for senior citizens is up to 0.25-0.50% higher than that of non-senior citizen investors, depending on the financial institution.

3. NRI or NRO fixed deposit

This fixed deposit is especially available for Indian investors who are staying or working abroad. These may also come with tax benefits, but it depends on the type of FD. 

The above-mentioned list of fixed deposit types is not exhaustive. It is important to note that all financial institutions may not offer every type of fixed deposit. So, be sure to check all the details and terms and conditions. 

This way, you can ensure that investment is as per your goals. To help you get started with an FD investment, visit Bajaj Markets and check out a few competitive interest rates from leading issuers. 

You can use the fixed deposit interest calculator to compute the returns on a monthly basis. All you need to do is enter the rate of interest, tenor, and amount invested.