Types of Fixed Deposits and How to Choose a Suitable Fixed Deposit?

What is a Fixed Deposit?

Fixed deposits are also known as term deposits. They are a type of investment that lets you gain interest by depositing an amount for a fixed tenure. The rate of interest on FDs is predefined and fixed, but it depends on tenure. For example, SBI FD rates for the general public for a tenure of one year is 4.90%. For senior citizens, for the same tenure, SBI FD rates are 5.50%.

Generally, the fixed deposits have a lock-in period and as an investor of FD, you cannot withdraw money from it before completing this period. If for any reason, you have to withdraw money before the completion of the lock-in period, you have to pay a penalty on the rate of interest.

Types of Fixed Deposits:

There are different types of fixed deposit options provided by Indian banks. The common types of fixed deposits are:

Standard Fixed Deposits:

Almost all Indian banks offer this type of fixed deposit option to their customers. With a standard fixed deposit, you can invest your money for a fixed term and it offers you a fixed rate of interest that generally depends on the tenure of the deposit. Common features of Standard Fixed Deposit are:

• The amount is deposited for a fixed term.
• The term of deposit may range from seven days to 10 years.
• The bank pre-defines the rate of interest.
• The rate of interest you get in a Standard Fixed Deposit is higher than a savings account deposit.

Tax-Saving Fixed Deposit:

Tax-Saving Fixed Deposit is different than Standard Fixed Deposits in a way that you cannot invest your money in it for less than five years. The amount you invest in this type of FD is eligible for tax exemption U/S 80C of the Income Tax Act. However, the interest earned from this fixed deposit is eligible for tax. The features of this fixed deposit are:

• The amount that is eligible for tax exemption under this fixed deposit scheme is Rs. 1,50,000 in one year.
• Under this fixed deposit scheme, only lump-sum deposits are allowed.
• These fixed deposits have a lock-in period of five years.

Special Fixed Deposits:

These fixed deposits are termed as ‘special’ as they are provided for a special or specific period. This special tenure can be anything such as 390 days or 290 days, etc. The rate of interest offered by these special fixed deposits is higher. This is the reason they are a popular choice among investors. The features of these fixed deposits are:

• You have to invest in special FDs for a specific tenure.
• You cannot withdraw your money for this specific tenure.
• The rate of interest offered in Special Fixed Deposits is higher than Standard Fixed Deposits.

Cumulative Fixed Deposits:

In cumulative fixed deposits, the interest is provided with the invested amount upon maturity of the FD. The features of this fixed deposit are as follows:

• The interest is compounded annually, half-yearly, quarterly, monthly, bi-weekly, or weekly basis, and it is paid when the fixed deposit matures.
• This deposit helps you to grow your invested amount.

Non-Cumulative Fixed Deposit:

The features of non-cumulative fixed deposit are as follows:

• The interest is paid annually, half-yearly, quarterly, or monthly basis according to your choice.
• This type of investment is better for pensioners who are looking out for a regular source of income.

Senior Citizen’s Fixed Deposit:

This fixed deposit is for senior citizens or for those who are more than 60 years old. The features of this fixed deposit are:

• The senior citizens get an additional rate of interest on fixed deposits. This additional rate may range from 0.25% to .50% more than standard FD rates.
• The term of senior citizen FDs are also flexible.

Flexi Fixed Deposits:

These fixed deposits are linked to your savings account. The basic features of this FD variant are:

• Under this FD scheme, you can open an FD account with some initial deposit that can be of your choice and then link this account to your savings account.
• You can as well apply a limit on your savings account and any excess to this limit can be transferred to your fixed deposit account.

How to Choose a Suitable Fixed Deposit

Which bank is the best for fixed deposit? Or what is the suitable type of fixed deposit for me? If these are some of your concerns, then do not worry as we are here discussing the points that you must consider before finalizing a fixed deposit. Keeping these points in your mind, you can choose a suitable fixed deposit:

• Tenure of the Fixed Deposit: The rate of interest on FD very with tenure. This means for different tenures; the FD interest rates are different. Most of the time, the fixed deposits with longer tenures have higher interest rates. However, long tenures lock-in your money for that period, and, thus it compromises the option of liquidity. So, if you want to invest your money to fulfill your short-term goals, it is recommended to invest for short tenure FD. The tenure of fixed deposits varies from seven days to 10 years and you can select as per your requirement. So, it is recommended to opt for a bank that offers flexibility in tenures.
• Premature Withdrawal: Before opting for a fixed deposit account with a bank, it is advised to check for the terms and conditions of premature withdrawal. Generally, the banks provide the clauses for premature withdrawal on their website. Most of the banks deduct penalty on premature withdrawal from FD and give you an option for liquidity.
• Rate of Interest: The rate of interest offered on fixed deposit is one of the most important factors to consider. Higher the rate of interest greater the returns from FD. So, you can opt for a bank that offers a higher rate of interest on fixed deposits.
• Additional Advantages: With interest rates, the banks also provide many other benefits like the facility of loan against your FD account. Some banks as well offer the feature of auto-renewal and the facility of overdraft for high liquidity of the deposited funds.

The Final Words!

Despite the countless options of investments available in India, people prefer fixed deposits. The reasons for the popularity of fixed deposits are safety, security, and steady growth of your invested amount. Upon completion of the tenure of FD, the bank pays back the invested amount along with interest. The different types of fixed deposits offered by banks allow you to opt for a suitable FD option.