As low-risk saving tools, fixed deposits allow you to park a lump-sum corpus and earn interest on the same for a predetermined tenor. The rate of interest is fixed at the time of depositing the amount and remains unchanged during the selected tenor. While generally, the interest earned on the deposited sum is much higher than regular savings bank deposits, most banks and NBFCs also offer preferential rates for seniors.
There are different types of fixed deposit plans available in India with tenors ranging from 7 days to 10 years. Certain types of FDs permit premature withdrawals against a penalty payment, while others don’t offer this benefit. Additionally, FDs also come with flexible payout options where you can choose to receive the entire amount at maturity or opt for a monthly interest payout plan.
Since banks and NBFCs offer various types of fixed deposit plans, it is important to first assess your own investment goals. Here’s a run through of the different types of fixed deposits, and their meanings:
All banks offer these types of fixed deposit accounts to both new and existing customers. When you open a standard fixed deposit account, you agree to park a certain sum of money against a predetermined rate of interest for a given tenor. Usually this tenor varies from 7 days to 10 years.
Corporate FDs are guaranteed saving avenues offered by private financial institutions and non-banking financial companies (NBFCs). Much like bank FDs, these plans allow you to invest a lump-sum amount at a given rate of interest for an investment tenor of your choice. Corporate FDs are rated by credit agencies like ICRA and CRISIL and offer higher rates of interest than standard bank FDs.
With this type of FD, you can claim tax exemptions of up to ₹1.5 Lakhs under Section 80C of the Income Tax Act 1961. Investing in such an FD is only prudent if you have no liquidity concerns as they come with a minimum lock-in period of 5 years. Additionally, no overdraft or loan facility is available against such FDs.
Available to only those above the age of 60, a senior citizen FD offers a hiked interest rate over and above the base rate applicable for regular citizens. Senior Citizen FD rates for most banks and NBFCs tend to be 0.25%-0.50% higher than the base ROI.
With a cumulative fixed deposit plan, you are only entitled to the interest payout at maturity. In other words, while you earn interest on your principal sum at regular intervals, it is only payable once the investment tenor ends. The interest earnings are compounded and are added to your principal sum. These types of fixed deposits are good for those looking for long-term investments.
A non-cumulative FD is one where you can select an interest payout frequency of your choice. Thus, you can pick a monthly, quarterly, half-yearly or yearly payout option to meet your monthly expenses like outstanding utility bills and EMIs. Such types of fixed deposit plans are well-suited for people who require regular interest payouts to meet monthly expenses.
Flexi FDs merge the liquidity benefits of a savings bank account with the higher interest rate advantage of fixed deposit plans. Since a flexi FD is linked to a savings account, you can choose to withdraw sums as and when needed, while still earning high rates of return.
Most banks and NBFCs offer three types of fixed deposit plans to non-resident Indians, namely, NRO, NRE and FCNR FDs. Each of these FD plans come with different deposit currency and taxation norms.
FDs work on the simple principle of interest accruing on a sum invested for a given lock-in period. Thus, when you decide to park a lump-sum amount into a fixed deposit account, you must pick an investment tenor for the same. During this tenor, you earn certain returns on the amount as per the pre-given rate of interest. Depending on the type of fixed deposit, this interest can either be added to the principal amount to be paid at maturity or paid out at a frequency of your preference.
Certain types of fixed deposit accounts allow premature withdrawals before the lapse of the selected investment period. However, such withdrawals do attract a certain interest penalty. They also offer loans and overdraft facilities on the invested amount.
Before you start reviewing the different types of FD plans, here’s a list of factors you should consider:
To ensure that you earn maximum returns on your investment, remember to compare interest rates offered by different types of fixed deposits. For instance, interest earned through a corporate FD may be more than a bank FD.
If you wish to enjoy easy liquidity benefits from your FD account, remember to verify the premature withdrawal policy on the account before investing. While most banks and NBFCs levy a 0.5%-1% interest penalty on such withdrawals, checking this clause beforehand lets you pick a lender with the lowest penalty. Additionally, there are certain types of fixed deposit accounts -like tax-saving FDs- where premature withdrawals are not permitted during the 5-year lock-in period. Thus, it is important to carefully assess this factor before investing.
FDs are not just tools of building fiscal security for the future but can also come in handy for times when you need lump-sum cash reserves. By opting for an FD account with loan facility, you can ensure that you have enough cash reserves to deal with a cash crunch. However, not all types of fixed deposit accounts offer this facility and the total loanable amount for ones that do offer it also varies.
Weighing in the lender’s credibility is equally important when it comes to picking an FD account. You can assess the credit ratings of the lender as per established credit bureaus like CRISIL and ICRA. The credit ratings of a lender signify the safety of the saving plan and the consistency of the lender’s payment history.
Different types of fixed deposit plans offer differ payout options. For instance, a cumulative FD will entitle you to a lump-sum payout at maturity, while a non-cumulative one will allow for monthly payouts. If you have other sources of monthly earnings, then letting your money grow with a cumulative FD may be a prudent choice. However, if you’re a retired individual, a monthly payout option may be better suited.
The interest you earn from your FD is taxable under Section 80C of the Income Tax Act, 1961. However, certain types of fixed deposit plans - tax-saving FDs - give you an annual tax exemption of up to ₹1.5 Lakhs. While such tax rebates may seem attractive, you should also know that such plans come with a mandatory 5-year lock-in period. Thus, you should only opt for such plans if you don’t need the money in the next 5 years. Alternatively, if you feel you might need liquidity benefits, opt for an FD with flexible tenors.
The different deposit types in FDs include bank, corporate, tax-saver, cumulative, non-cumulative, senior citizen, flexi and NRI FDs.
Tenor refers to the length of time during which your invested amount earns interest in an FD account.
No. While tenor is the investment time period for an FD, decided at the time of opening the account, maturity is the date on which the tenor expires.
If you have short-term goals and high liquidity needs, a flexi FD may be best. Under these types of fixed deposits, you can earn high returns and make withdrawals without attracting penalties. In case you have long-term goals and no immediate liquidity concerns, a tax-saving or corporate FD with a long tenor may be a betterfit.