What is a Fixed Deposit?
The banks and non-banking financial companies (NBFC) offer investment instruments known as fixed deposit or FD. It is a type of term deposit in which you are can deposit money for a higher interest rate as compared to a savings account.
The money can be invested for a fixed term ranging between 7 days to 10 years at a fixed interest rate. You can earn interest on fixed deposits as per the applicable terms and conditions. There are two options to get FD interest. You can get it credited to your account at regular intervals or you can open a recurring deposit account and get the interest at the time of FD maturity.
Once you invest the money in an FD, you will receive the maturity amount at the end of the tenure. It is important for you to know that after locking the amount for a fixed tenure, you cannot withdraw the money before maturity. However, if you wish to withdraw it then you will have to pay a penalty.
Features of a Fixed Deposit
The several features of fixed deposit are mentioned below:
- The scheme enables the investor to earn higher interest. The money can be deposited in a fixed deposit account only one time. If you want to deposit more amount, you will have to open a fresh FD.
- It is easy to renew fixed deposits.
- According to the Income Tax Act, 1961, the tax is deducted at source from fixed deposit interest.
- Though liquidity is lesser in fixed deposits, the interest is higher.
Types of Fixed Deposits
There are two types of fixed deposits are available i.e. cumulative FDs and non-cumulative FDs.
- Cumulative Fixed Deposit- The cumulative fixed deposit offers compounded interest on the quarterly or yearly basis. The interest is paid at the maturity time. The cumulative FD offers a high rate of interest.
Ideal for- The individuals looking forward to saving and growing their savings.
- Non-Cumulative Fixed Deposit- The non-cumulative fixed deposit offers interest on a monthly, quarterly, half-yearly or annually basis, as per the investor’s choice. Non-cumulative FD offers a low rate of interest.
Ideal for The individuals who want a regular income from their savings.
Advantages of Investing in Fixed Deposit
Here are several advantages of investing in fixed deposit:
- It offers greater stability as it is one of the safest investment instruments.
- There is no risk of principal loss and the assured returns are offered on a fixed deposit.
- In order to manage your monthly expenses, you can opt for the interest payout on a monthly basis.
- The fluctuations in the market do not affect your fixed deposits, thus ensuring greater safety for your investment capital.
- It offers a higher rate of interest.
- It offers the highest returns for the senior citizens.
Fixed Deposit and Tax
Do you know that the interest received from fixed deposits is taxable? Yes, ranging from 0 per cent to 30 per cent, the tax is deducted at source on fixed deposit. The TDS is deducted on the basis of investor’s income tax bracket.
If you earn interest more than Rs. 10,000 in a year, then approximately 10 per cent TDS will be deducted by the bank. For this deduction, you must submit a copy of your PAN card. In case you don’t provide your PAN details, then 20 per cent TDS will be deducted. However, you can claim the deducted TDS if your total income is less than the minimum tax slab of 10 per cent.
If you do not fall in the income tax bracket, you can submit Form 15G to your bank in order to avoid the tax deduction.
The senior citizens can submit Form 15H in order to avoid the tax deduction. If you fall in the tax bracket that is higher (20-30 per cent) then you will have to pay extra tax which will be over and above the deducted TDS.
FD interest have fallen consistently over the last 5 years.
Definition of Monthly FD payout
Fixed deposit is an ideal investment option for all age groups. It offers good returns with minimal exposure to risk. The banks that have a high credit rating have a consistent stability. As a result, they are better to opt for fixed deposits.
To get payouts on a monthly basis, you can opt for a non-cumulative fixed deposit. Also, you must ensure that the rate of interest is not too low. Investment experts recommend using tools such as FD interest rates calculator. It is easily available online and can be used to know the fixed deposit interest rates (According to the Income Tax Act, 1961, the tax is deducted at source from fixed deposit interest.) in a matter of a few clicks.
Use of FD interest rates calculator
An FD interest rates calculator is a tool that is available for calculating the returns offered by a fixed deposit. By entering a few basic details, you will be able to calculate the maturity amount of a fixed deposit. It is to be noted that the maturity amount varies with the amount of deposit, type of deposit, tenure and the type of customer.
You can follow the below-given steps in order to use the FD Calculator.
- Type FD calculator online and conduct a Google search.
- Select the customer type. Remember, all options will offer a different rate of interest.
- Select the type of fixed deposit.
- Enter the deposit amount you want to invest. Now select the tenure of your fixed deposit.
The result will be displayed as per your input.
Here is the formula for fixed deposit calculation:
A = P (1 + r/4/100) ^ (4*n)
A = P (1 + r/25)4n
Here, A stands for the amount on maturity
P stands for the amount deposited
n stands for the frequency of compounded interest
By using FD interest rates calculator you can easily plan your investment without any hassle.
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
Factors Affecting the FD Interest Rate
Following are the factors affecting the FD interest:
- Higher the amount is deposited, higher the interest would be paid out.
- Higher interest is offered if the amount is deposited for a longer You can get higher interest if you opt for cumulative fixed deposits.
- While you can compound your interests on a monthly, quarterly, half-yearly or annually basis, your interest amount might get decreased on the frequent compounding of interest rates.
The existing customers and senior citizens are offered a higher rate of interest.
You may also like to read: What is an Annuity | Annuity Calculator | Annuity Formula
Investment Options for Monthly Income
Today, there are numerous investment options available that give you the freedom to accomplish your investment goals. Apart from the fixed deposit scheme, you can consider the investment options mentioned below.
- Post Office Monthly Income Scheme- If you want to earn extra income on a continuous basis, at the same time you do not want any kind of risk, then the post office monthly income scheme is one of the best choices that you can opt for.
The interest is paid at an annual rate of 7.8 per cent. The accounts opened from December 2007 to November 2011 will get a 5 per cent bonus on the principal amount on maturity. Though the scheme comes with a maturity period of 5 years, you can withdraw the amount on completion of one year.
Here is the applicable deduction for pre-mature withdrawal of the account:
- For Closing the Account between One Year to Three Years- 2 per cent will be deducted from the total amount deposited.
- For Closing the Account between One Year to Three Years- 1 per cent will be deducted from the total amount deposited.
- Equity Share Dividend- Opting for this option exposes you to a higher risk factor, though it allows the high investment appreciation over the long term and promises to give you a regular income.
For investing in ESD, you need to have a varied portfolio that includes several stocks. Having a varied portfolio boosts the dividend payout ratio. There could be a possibility that the company won’t pay regular dividends because you get dividends on profits, not on capital.
- Corporate Fixed Deposits- Based on the deposit tenure and ratings, many corporations such as the housing finance companies and NBFCs offer a high rate of interest on fixed deposits. It provides interest on the quarterly or half-yearly basis. For senior citizens, it offers an additional rate of up to 0.25 per cent. In order to avoid the risk of default from companies or delay in payment, you should opt for a company that has consistently stable ratings of at least AAA. You can also lower the risk by depositing your money in FDs offered by multiple companies.
- Savings Scheme for Senior Citizens- People aged 60 or above are eligible to avail special investment scheme offered by the post offices and certified banks across India. It is a zero risk element and provides significant returns. It provides interest at the rate of 8.6 per cent on annual basis.
Retirees (who have availed Voluntary Retirement Scheme or Superannuation) falling between the age brackets of 55 years to 60 years are also eligible to opt for savings scheme for senior citizens.
You will have to open an account within the first month of receiving the retirement benefit.
- Mutual Fund Monthly Income Plan- If you have a moderate risk appetite, then mutual fund monthly income plan is apt for beating inflation. You can get monthly income by selecting a dividend-payout option for the tenure of two to three years. Generally, the ratio of investment is 20 per cent to 30 per cent in equity securities and 70 per cent to 80 per cent in debt instruments like deposit certificates.
- Long-Term Government Bond- This is another option that you can select for negligible-risk with better returns. You can opt for getting interest once or twice a year. This option of investment can be clubbed with other ones in order to be able to earn income throughout the year. Also, you can sell them as per your choice, since they are traded in the secondary market. But you need to remember that your funds should be locked-in for a long tenure that might go from 15 to 20 years.
- Annuity- Annuity plans are a good option to opt for as it offers a regular income and lower risk exposure. Most of the insurance companies in India offer this plan. This scheme can be used as a retirement plan with the help of a lump sum investment that will provide you income at fixed intervals. The duration of the payment period can be divided into an Immediate Annuity and Deferred Annuity.
While immediate annuity provides income on a regular basis soon after making the lump sum payment, deferred annuity offers payment after a predefined fixed tenure. There are several charges involved including surrender charges and commission fees. Also, the plan does not provide any tax benefits*.
*All savings are provided by the insurer as per the IRDAI approved insurance plan. Standard T&C Apply
In a Nutshell
Before you zero down on an investment option, make sure you have the clarity about the offered returns and applicable terms and conditions. Having a clear understanding will leave no room for any confusion or assumption.
Written By: PolicyBazaar - Updated: 09 August 2021