Types of Fixed Deposit

Fixed Deposit – Meaning

As low-risk saving tools, fixed deposits allow you to park a lump sum amount safely and earn interest for a predetermined tenor. The interest rate is fixed at the prevailing rate when you deposit the amount and remains unchanged during your selected tenor. 

Generally, the interest you earn on the deposited sum is much higher than regular savings bank deposits. Moreover, most banks and NBFCs also offer preferential rates to senior investors.

Different types of fixed deposit plans are available in India, with tenors ranging from 7 days to 10 years. In addition, certain types of FDs permit premature withdrawals against a penalty, while others do not offer this benefit. 

FDs also come with flexible payout options where you can choose to receive the entire amount at maturity or at regular intervals. You can also opt for a monthly interest payout plan. 

Now that you know the fixed deposit meaning, read on to understand different types of fixed deposits and their features.

Different Types of Fixed Deposits

Since banks and NBFCs offer various types of fixed deposit plans, it is essential to assess your investment goals first. Before investing in an FD, knowing the fixed deposit meaning and FD types are crucial to help you generate better returns. 

Here is a run-through of the different types of fixed deposits and their meanings:

• Standard Bank Fixed Deposits

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 interest rate. Usually, the tenor of this type of FD varies from 7 days to 10 years.

• Corporate Fixed Deposits

Corporate FDs are guaranteed saving avenues offered by private financial institutions and non-banking financial companies (NBFCs). These FDs also allow you to invest a lump sum amount at a given interest rate for an investment tenor of your choice.

Corporate FDs are rated by credit agencies like ICRA and CRISIL and offer higher interest rates than standard bank FDs.

• Tax-Saving Fixed Deposits

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. However, investing in this FD is only prudent if you have no liquidity concerns, as they have a minimum lock-in period of 5 years. 

Additionally, no overdraft or loan facility is available against such FDs.

• Senior Citizen Fixed Deposits 

A senior citizen FD is available to only those above 60 years of age. It 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.

• Cumulative Fixed Deposits

With a cumulative deposit type in FD, you are only entitled to the interest payout at maturity. In other words, while you earn interest on your principal investment 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 suitable for those looking for long-term investments. Cumulative FD interest rates are generally higher than rates that apply to non-cumulative FDs.

• Non-cumulative Fixed Deposits 

A non-cumulative FD is one where you can select an interest payout frequency of your choice. You can pick a monthly, quarterly, half-yearly, or yearly payout option to meet your expenses, like utility bills or EMIs. 

Such types of fixed deposit plans are well-suited for people who require regular interest payouts to meet daily or recurring expenses.

• Flexi Fixed Deposits 

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 get to enjoy higher liquidity while still earning high rates of return.

• NRI Fixed Deposits 

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 comes with different deposit currency and taxation norms. 

How Does an FD Account Work?

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 in 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 is payable in the following ways: 

• The interest gets added to the principal amount and is paid at maturity 

• The interest is paid out at a frequency of your preference

Certain fixed deposit types allow premature withdrawals before the selected investment period lapses. However, such withdrawals do attract an interest penalty. In addition, you can avail of loans and overdraft facilities against your FD.

How to Select the Right FD?

Before you start reviewing the different types of FD plans, here is a list of factors you should consider: 

• Interest Rates 

To ensure that you earn maximum returns on your investment, remember to compare interest rates offered by different types of fixed deposits and issuers. 

For instance, interest earned through a corporate FD may be more than a bank FD. Moreover, one NBFC may offer higher FD rates than another. So, make sure to select the best one for your needs.

• Premature Withdrawal Clause 

If you wish to enjoy liquidity benefits from your FD account, remember to check the premature withdrawal policy before investing. 

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 at the onset.

• Loanability 

FDs are not just tools for building financial security for the future but can also come in handy when you need lump-sum cash reserves. By opting for an FD with a loan facility, you can ensure that you have easy access to funds to deal with a cash crunch. 

However, not all types of fixed deposit accounts offer this facility. Additionally, the total loanable amount for those that do offer it also varies.

• Credibility of the Issuer

Weighing in the lender’s credibility is equally important when picking an FD to invest in. You can assess the credit ratings of the FD issuer as per established credit bureaus like CRISIL and ICRA. 

These credit ratings signify the safety of the saving plan and the consistency of the issuer’s payment history.

• Payout Frequency 

Fixed deposit plans offer various 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, a monthly payout option may be ideal if you are a retired individual.

• Tax Exemptions and Tenors 

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, such as tax-saving FDs, provide you with an annual tax exemption of up to ₹1.5 Lakhs. 

While such tax rebates may seem attractive, you must know that such plans come with a mandatory 5-year lock-in period. Thus, you should only opt for such plans if you do not need the money in the next 5 years. 

Alternatively, opt for an FD with flexible tenors if you feel you may need liquidity benefits. 

So, it is imperative to understand the fixed deposit meaning along with its various types before booking an FD. To compare the interest rates from top issuers and select an FD plan that best aligns with your financial goals, you can visit Bajaj Markets.

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