Investing your money wisely is essential for financial growth, but it often comes with a level of risk. For those who prefer a safer approach with guaranteed returns, fixed deposits (FDs) offer an attractive solution. Fixed deposits are offered by banks and non-banking financial companies (NBFCs), each catering to specific needs. They allow you to invest a lump sum for a fixed period and receive interest. But with so many options available, how do you choose the best one for your needs?
In this article, we’ll explore the different types of fixed deposits to help you understand their unique features and benefits.
Types of Fixed Deposits
1. Standard Fixed Deposit
The standard fixed deposit is one of the most popular FD options. Offered by all major banks, this FD allows depositors to earn a fixed interest rate over a selected period. Tenures can range from 7 days to 10 years, depending on the bank’s terms. Interest is typically higher than a savings account, making it a safe and profitable option.
Key Benefits: Predictable returns, flexibility in tenure, and ease of access to loan or overdraft facilities against the deposit.
2. Tax-Saving Fixed Deposit
For those looking to save on taxes, a tax-saving fixed deposit is an excellent choice. Under Section 80C of the Income Tax Act, investors can claim a tax deduction of up to ₹1.5 lakh. However, the lock-in period for this type of FD is 5 years, meaning you cannot withdraw the money prematurely.
Key Benefits: Tax deduction, secure returns, and fixed interest payouts.
3. Cumulative Fixed Deposit
In a cumulative FD, the interest is compounded and added to the principal amount, making it an ideal option for long-term investments. You only receive the interest at the time of maturity, which helps build your capital more effectively.
Key Benefits: Compound interest, higher returns, and ideal for long-term investors.
4. Non-Cumulative Fixed Deposit
A non-cumulative fixed deposit (FD) pays out interest at regular intervals, which could be monthly, quarterly, half-yearly, or annually. This type of FD is ideal for individuals who seek a consistent income stream, such as retirees or those depending on passive income sources.
Key Benefits: Regular interest payouts and flexibility in income intervals.
5. Flexi Fixed Deposit
Flexi Fixed Deposits blend the benefits of a savings account and a fixed deposit. You can link your savings account to this FD, and any amount exceeding a set limit is automatically transferred into the fixed deposit to earn higher interest. It provides the flexibility to withdraw funds when needed without breaking the entire deposit.
Key Benefits: High liquidity, better interest rates, and flexibility.
6. Senior Citizen Fixed Deposit
Senior citizens enjoy higher interest rates on their fixed deposits. Banks generally offer an additional interest rate, usually 0.5% to 0.75% higher for Senior Citizen Fixed Deposit than regular FDs. The payouts can be customised to suit seniors’ financial needs, with options for monthly, quarterly, or annual interest payments.
Key Benefits: Higher interest rates, regular payouts, and flexibility in tenure.
7. Corporate Fixed Deposit
Corporate FDs are offered by NBFCs and Housing Finance Companies (HFCs). They usually provide higher interest rates than bank FDs, making them attractive to investors seeking better returns. However, they are not covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme, so it’s essential to assess the credit rating of the offering institution.
Key Benefits: Higher interest rates and flexible tenure options.
Types of Fixed Deposits for NRIs
Fixed deposits are also available to Non-Resident Indians (NRIs) in specialised formats, such as NRE, NRO, and FCNR deposits.
1. NRE Fixed Deposit
A Non-Resident External (NRE) FD allows NRIs to invest in India using foreign currency. The amount is converted to Indian Rupees (₹), and the interest earned is tax-free in India. Additionally, both the principal and interest are repatriable, making it an excellent option for NRIs looking for risk-free investment in India.
Key Benefits: Tax-free earnings, full repatriability, and attractive interest rates.
2. NRO Fixed Deposit
The Non-Resident Ordinary (NRO) FD is suitable for NRIs with income generated in India, such as rental income or earnings from investments. The interest earned on this FD is subject to tax, and the principal is only partially repatriable.
Key Benefits: Suitable for managing Indian income and flexible tenures.
3. FCNR Fixed Deposit
The Foreign Currency Non-Resident (FCNR) FD allows NRIs to maintain their deposits in foreign currencies like USD, GBP, or EUR. The interest earned is tax-free in India, and the account protects the depositors from currency exchange rate fluctuations.
Key Benefits: No currency risk, full repatriability, and tax-free interest.
Callable and Non-Callable Fixed Deposits
1. Callable Fixed Deposit
Callable FDs allow premature withdrawal of the deposit, but banks usually charge a penalty. This option is useful for individuals who may need liquidity before the maturity period.
Key Benefits: Flexible withdrawal options.
2. Non-Callable Fixed Deposit
Non-callable FDs do not permit premature withdrawal, but they offer higher interest rates than callable FDs. They are best for those who can lock in their investment for the full tenure without needing early access.
Key Benefits: Higher interest rates and secure investment.
How to Choose the Right Fixed Deposit?
Choosing the right FD depends on your financial goals, liquidity needs, and tax considerations. As an investor, you naturally want to secure the highest interest rates. However, the rate you get on a fixed deposit (FD) depends on the length of time you commit your money. Generally, shorter-term FDs offer lower rates, while longer-term FDs provide higher returns.
To make the most of your investment, consider diversifying your FD tenures. This strategy allows you to have access to some funds sooner while benefiting from the higher interest rates of longer-term FDs. By balancing short and long-term deposits, you can meet both immediate financial needs and long-term goals effectively.
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Conclusion
Fixed deposits remain a secure and reliable investment option for those seeking predictable returns without the market’s volatility. With a wide array of options such as standard, tax-saving, Flexi, and senior citizen FDs, along with specialised offerings for NRIs, there’s a fixed deposit scheme suited for every financial need.
Whether you are aiming for regular income or capital appreciation, a fixed deposit can be your go-to investment for stable returns.
FAQs
What is the minimum amount required to open a fixed deposit?
The minimum deposit amount varies by bank or financial institution but typically ranges between ₹5,000 to ₹25,000.
Are fixed deposits insured?
In India, fixed deposits with banks are insured under the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5 lakh per depositor per bank.
Can I take a loan against my fixed deposit?
Yes, many banks offer loans against fixed deposits at lower interest rates, usually up to 90% of the FD amount.
How is the interest on a fixed deposit taxed?
Interest earned on fixed deposits is taxable according to your income tax slab. For tax-saving FDs, the interest is also subject to TDS at 10%.
Can I change the tenure of my fixed deposit after opening it?
No, once a fixed deposit is opened, its tenure cannot be altered. You may need to close it and open a new one with the desired tenure.