Fixed Deposit Account - Best Investment to get fixed return

Fixed Deposit Account

A Fixed Deposit  is a type of investment offered by banks and it allows individuals to deposit lump sum money for fixed periods of time, like a month,(Half yearly) 6 months, (yearly) 1 yearly or for multiple years 5 years etc. In general, fixed deposit accounts offer a higher interest rates for fixed period than savings accounts which are liquid. Fixed deposits are known as safe investments and help people to grow their financial assets without exposing them to volatility of the markets and other risks associated with the financial market. Most of the banks offer fixed deposit accounts in India and the interest rates offered with these accounts depend on the tenure of deposit and other factors. The tenure offered with fixed deposits can range from 7 days to 10 years, whereas the interest rate offered can be as high as 9% per annum (Yearly). Some of banks even offer tax saving fixed deposits that offer tax benefits to customers.

Features of Fixed Deposit Account

•The main purpose of fixed deposit account is to enable the individuals to earn a higher rate of interest on their surplus funds (extra money).
•The amount can be deposited only once. For further such deposits, separate accounts should be opened.
•The depositor is given a fixed deposit receipt; which depositor should produce at the time of maturity. The deposit can be renewed for a further period.
•As per the Traditional scheme, the interest on the FD account is credited to the Savings account specified by the depositor monthly or on a quarterly basis. For the Reinvestment scheme, the interest is compounded to the principal amount on a quarterly basis.
•Tax is deducted at source, from the interest on Fixed Deposits, as applicable, as per the Income Tax Act, 1961.

Types of Fixed Deposits

There are various types of fixed deposit accounts that are available in India and investors can choose from the wide range of investment options based on personal and financial needs.

Normal/Standard Fixed Deposits

This is one of the most common fixed deposit accounts. It is also one of the most basic and uncomplicated forms of investment. A fixed sum of money is deposited for a certain pre-determined period and a certain interest rate is provided on the same.


• Fixed tenure
• Standard interest rates
• Easy investment
• Secure

Tax Saver Fixed Deposits

These type of fixed deposit accounts are usually for a longer tenure that ranges between 3 to 5 years, or more. Therefore, they come with a lock-in period and one cannot break these deposits or withdraw them prematurely, unless in the event of death of the account holder. The main advantage of these deposits is that one can claim tax exemption under Section 80C of the Income Tax Act.


• Cannot be broken until completion of tenure
• The interest gained on these deposits are taxable

Cumulative Fixed Deposits

When it comes to cumulative fixed deposits, the interest earned on this will not be available or paid to the policyholder at regular intervals. Instead, interest will be paid only upon completion of the fixed deposit tenure along with the principal amount.


• Interest paid with principal at the time of maturity
• Not ideal for those without a regular income like pensioners etc.
• Interest is compounded on a weekly, bi-weekly, monthly, quarterly, half-yearly or yearly    basis
• This leads to higher gains, making it a more profitable form of investment

Non-Cumulative Fixed Deposits

In the case of non-cumulative fixed deposit, the bank pays the account holder the interest earned on the principal amount at regular frequencies.
• Good option for pensioners
• Extra income
• Account holder can choose at what interval dividend should be paid
• Usually one tends to earn lesser overall in this scheme when compared to cumulative fixed deposit scheme
Flexi Fixed Deposits
A flexi fixed deposit is a type of fixed deposit account where the savings account is linked with the term deposit.
• Provides flexibility
• Convenient
• Best of both worlds

What Are the Benefits of Fixed Deposit?

1. Assured returns: One of the main advantages of having a fixed deposit (FD) account is that it provides guaranteed returns on the investment. Hence, there is no risk involved in FDs when compared to other types of investments like mutual funds, debt funds, etc. Therefore, a fixed rate of interest will be paid on the investment amount.

2. Very easy to open an FD account: It is a very easy to open an FD account and this can be done online in a matter of minutes. One can open FD accounts online in most of the major banks across the country with minimum documentation.

3. Encourages Saving: Opening an FD encourages the habit of putting aside money for the rainy days of life. This inculcates the discipline of saving money for the long term.

4. Higher rate of interest: FD accounts offer a higher interest rate when compared to savings accounts or other types of term deposit accounts like recurring deposits, etc. There are many banks, non-banking financial companies and other financial institutions that offer an attractive rate of interest.

5. Flexibility: FD gives the account holder the flexibility to choose the amount of money he/she wants to invest and decide on the tenure range. One can make investments for a minimum period of 7 days and maximum period of 10 years. There are some banks that also offer FDs for more than 10 years.

6. Multiple accounts: One can hold multiple FD accounts at the same time without any hassle. For example, an individual can hold 2 or 3 FD accounts in the same banks. One can also hold FD accounts across different banks.

7. Tax benefit: There are tax saver FDs that offer tax benefit under Section 80C of the Income Tax Act. One can invest up to Rs.1,50,000 and claim tax exemption for the same. However, most tax saver FDs have a lock-in period of 5 years.

8. Helps beat risk: Opening an FD account is the best financial instrument to beat risks that arise from investing in other high-risk financial instruments such as stocks, mutual funds, etc. This helps manage financial risk on a long-term basis.

9. Avail loan on FD: One can avail a loan in times of financial crisis on the FD amount. An individual can take up to 90% of the FD account amount as a loan. Please note that the account holder will still earn interest on the remaining amount left in the account.

10. Minimal to no risk investment: FDs are minimal to no risk investments. One need not spend sleepless nights or worry about losing money in this type of investment.

11. Highly liquid investments: FDs offer the customer the advantage of liquidity. In case there is a cash crunch or any other type of financial emergency, one can always close the FD or make an overdraft withdrawal from the same.

12. Interest can be paid quarterly: One can supplement one's income and earn a fixed sum on interest on a monthly, quarterly, or half-yearly basis. For instance, in cumulative FDs, the interest amount is credited to the account of the FD holder on a regular basis. This comes in handy for those who do not have a regular source of income like pensioners etc.

FAQs of FD

How does a fixed deposit account work?

A fixed deposit allows an individual to keep a certain amount of money with a lender/bank for a certain duration of time for which he/she can earn a certain interest amount. The interest earned on an FD account is calculated based on the deposited amount and the term of the account. An FD account with a higher deposit amount will attract higher Fixed deposit interest rates and likewise. The individual can choose to deposit a certain amount of money for a minimum of one month and a maximum of five years. As the name sounds, a fixed deposit account doesn’t provide the facility to withdraw the fund before the maturity, however, should the need arise, the account holder can liquidate the funds for a much lesser interest rate. The customers should keep in mind that the interest earned on an FD account is subject to income tax.

Can I break my fixed deposit before maturity?
Yes, a fixed deposit account can be liquidated before maturity, however, the interest payable will be lesser than what is given at maturity of the account. The account holder will need to get in touch with the bank or use the net-banking service (subject to availability) to liquidate the fixed deposit account at any time during the term.

What is meant by cumulative fixed deposit?

A fixed deposit account is provided under either a cumulative or non-cumulative deposit scheme. Under a cumulative fixed deposit account, the account holder is entitled to the interest that is payable at the account maturity along with the principal amount. In cumulative deposits, the interest is accumulated with the deposit amount, which is eligible to earn compounding principle interest on monthly/quarterly/annually basis. Whether the account reaches the maturity or subject to premature withdrawal, the principal, as well as the accumulated interest amount, is paid to the customer at the end of the term.

What is good, FD or RD?

A FD is an investment plan where a lump sum is put aside for a fixed period to earn interest.
A recurring deposit (RD) account is a type of investment plan where a certain sum of money is deposited every month or at set intervals of time for a fixed tenure. Interest is earned on the same.
The interest earned on an FD will be much higher than that earned, for the same amount and interest rate, on an RD. Therefore, it always wise to choose an FD over an RD.

Is fixed deposit tax free?

Those investing in a tax saver fixed deposit can claim exemption under Section 80C of the Income Tax Act. The sum invested towards this will be deducted and will not be a part of the taxable income.
However, one must note that the interest earned on such term deposits will be taxable based on the tax bracket of the individual.

Is fixed deposit under 80C?

Only in case of tax saver fixed deposits, exemption can be claimed under Section 80C of the Income Tax Act. For other types of fixed deposits, interest earned will be taxed and exemption cannot be claimed under this section.

What is non-cumulative fixed deposit?

A non-cumulative fixed deposit scheme is an investment plan where the interest is payable at regular intervals, which may be payable on a monthly, quarterly or half yearly basis, depending on the type of bank. This ensures that the investor is earning interest at regular frequencies on the fixed deposit. On the other hand, in a cumulative fixed deposit account, interest is payable only upon maturity along with the principal amount.

Fixed Deposit Nomination Rules India

• A nominee is a person who is chosen by the fixed deposit (FD) holder as the one who will have a legal right over the money in the FD account in case of demise of the FD holder

• Even if there is any rival claim, the amount in the FD account must be paid to the nominee. The nominee will be entitled to get the FD money even if a legal heir makes a claim

• A nominee need not always be a family member or legal heir.

• As per rules, in most cases, banks will allow the GD account holder to nominate only one individual.

• One can change the nominee or cancel the nomination at any point of time by filling a simple application form.

• In case the individual holds many FD accounts at the same time, he/she can nominate different individuals for different accounts.

• In case the FD account holder has not made any nomination, the money will be transferred to the account of the legal heir after his/her demise.

• If the account holder has not nominated anyone while opening a fixed deposit but wants to do so at a later stage, it can be done.

• A nomination can be made by filling up the nomination form and submitting valid documents.

• For all joint FD accounts, both the FD account holders will jointly carry the nomination process.

• All nominations can only be made in individual capacity and cannot be made in official capacity. This means that one cannot use any official designations for nomination.

• If the nominee is a minor, the term deposit holder must mandatorily appoint another nominee who will receive the money on the behalf of the minor.

• In most cases, one can only nominate individuals and not organizations. However, certain exceptions can be made to nominate trusts, etc.

• A nominee will be the first person the bank will contact in case the FD account holder die.

Nomination Procedure
• Fill in the nomination form and sign it
• Fill in detail of the nominee
• Confirm the percentage of nomination
• The nominee must sign the nomination form

Renewals and Withdrawals of Fixed Deposits

Renewal -

• Rolling over of deposits for another term wherein tenor can differ.
• Auto-renewal: Deposit-tenor remains unchanged but interest depends on rates prevailing at renewal.


• Encashment of deposits at maturity

• Encashment prior to maturity i.e. premature withdrawal subject to penalty Partial withdrawals (prematurely). Certain Banks now don't charge penalty example : IDFC First Bank.

• Amounts up to Rs. 20,000 can be withdrawn in cash. Amounts above Rs. 20,000 have to be transferred to the customer’s savings account or current account or paid-out through a crossed cheque.

• Sweep-In facility / Flexi-Deposits: Withdrawals allowed on interest accrued on an FD. The balance is then held as a new deposit.

• Tax-saving deposits: No withdrawals allowed for 5 years’ minimum.

• Either of the two are executed based on the account-holder’s instructions without which the deposit will be automatically renewed.

• Fixed Deposit Receipt must be surrendered upon renewal or withdrawal.

Premature Withdrawal of Fixed Deposit

Premature withdrawal or Breaking a fixed deposit means withdrawing the money before the maturity expires. This may be necessary if you urgently require the funds or if there are better investment opportunities elsewhere. Many people want to close their old Fixed Deposit account before maturity and open a new account when they see the current interest rates on fixed deposits in the market much higher than rate of interest at which they have opened FD sometime back.

Most of the banks charge premature withdrawal penalty in the form of a 0. 5-1% lower interest on customers looking to close their Fixed Deposit.

In the event of the FD being closed before completing the original term of the deposit, interest will be paid at the rate applicable on the date of deposit, for the period for which the deposit has remained with the Bank, with premature closure penalty.

Partial Withdrawal of Fixed Deposit

The Bank on request from the depositor, will allow withdrawal of term deposit before completion of the period of the deposit as per terms agreed upon at the time of placing the deposit. For such premature withdrawals and partial withdrawals, the Bank will levy a penalty of 1%, on the applicable rate. Partial withdrawal is permitted in units of Rs 1,000. The balance amount earns the original rate of interest.

Fixed Deposits for NRI
Non-Resident Ordinary (NRO) Rupee Accounts are maintained by non-resident Indians (NRI) in Indian Rupees, to keep funds that belonged to them before they turned NRI. These accounts can also be used to account for fresh earnings in Indian Rupees even after the individual has turned an NRI, from such sources as house rent, dividend and interests, salary etc. The interest earned from such accounts is taxable as per the Indian income tax regulations. Currently, Indian banks offer an interest rate from 8-10% on fixed accounts that fulfil the NRO parameters.
Alternatively, a Non-Resident External (NRE) Rupee Accounts are maintained by non-resident Indians (NRI) in Indian Rupees and are meant for foreign exchange that is earned in their country of residence and then transferred to India. The interest earned from such accounts is tax free and the funds can be moved around to other accounts without any restrictions. Currently, Indian banks offer an interest rate from 7-10% on fixed accounts that fulfil the NRE parameters.

Fixed Deposit Advantages and Disadvantages
Fixed deposit accounts provide a stable platform for investors to earn a guaranteed return on investment on their deposits with low or no market risks. A fixed deposit or term deposit account comes with a tenure which can easily be opened and liquidated if needed (subject to charges and terms of the account). There are various types of FD accounts that provide tax benefits to the investors. An FD account has its own advantages and disadvantages which are outlined below to help you make an effective investment decision.

Advantages of Fixed Deposit
FDs are popular for offering a safe avenue for investment which can provide tax deduction under Section 80C of the Income Tax Act, 1961. Over the years, people have been investing in FD accounts to avoid any kind of market risk while being certain about a earning a decent interest. Moreover, the other avenues of investment may provide a higher return provided the investor is willing to accept the risk factors. The following factors are few of the distinct advantages of investing in an FD accounts:

Risk factors - An FD account provide relief to the investor by facilitating a safe platform for investment. The other investment avenues such as mutual funds, stocks, debt funds, unit linked insurance plans, etc. carry market risk based on the type of the investment fund. because the investment is safe with an FD account, most investor choose FD accounts over other investment options. Moreover, RBI’s regulation for taking up an insurance on the FD account enables the investor’s account to be insured for up to Rs.1 lakh.

Loan options - In the event of an emergency, the investor can choose to avail a loan on the FD account for a lower interest rate. The interest rates for such loans are typically lower than the market rate for other types of loans. Hence, an FD account can come handy when the investor needs loan. Most FD accounts offer up to 90% of the FD value as the loan amount.

Flexible interest pay-outs - Based on the investor's requirements and type of the FD account, the interest is paid out at regular or periodical intervals. The investor can choose to receive the interest pay-outs on either annual or monthly basis along with an option to withdraw the interest at maturity.

• A higher interest rate for senior citizens - Most FD accounts offer a higher rate of interest for senior citizens which makes it popular even among the retired investors.

Disadvantages of Fixed Deposit Account

Though an FD account offers safety and decent income through interest, it has its own drawbacks. Nowadays, most investors are finding different avenues to increase the earning potential. Additionally, other avenues of investment disclose the level of risk anticipation based on the investor's financial goals and other needs. There are certain types of investment options that allow the investors to switch their investment fund during the term of the scheme for a nominal or no charges at all. Moreover, certain accounts set a threshold for market risk exposure which helps in securing a certain amount of fund before the risk factors impact the accounts severely. To decide whether to invest in an FD account or not, an investor must consider the following disadvantages of an FD account:

Earning potentials - It’s a known factor that an FD account is the not the best avenue of investment for maximum return. Though it offers safety, it lacks the higher returns what other investment options are capable of offering. There are certain banks and non-banking financial companies (NBFCs) who offer a higher rate of interest on the FD accounts, however, the earning potential is still lower than most investment options.

Liquidity factor - An FD account comes with a fixed tenure and the investor is expected to hold the account until maturity to be eligible for the complete earning, however, if he/she decides to liquidate the account before maturity, only a partial interest earning is provided. Moreover, the liquidation fee also contributes to the low earning of a premature FD account. Depending on the type of FD account and the financial institution, the investor may choose to wait for a period within the fixed tenure to avoid heavy premature withdrawal charges. There are certain financial institutions that offer a decent interest earning if the investor decides to wait for at least a year or two before liquidating the account before maturity.

Tax benefits - Unfortunately, tax benefits are applicable for certain types of FD accounts only (known as tax-saver FDs). Moreover, in case of a joint-account, only the first account holder is eligible for tax benefits under the Section 80C of the Income Tax Act, 1961.
While making an investment decision for an FD account, the investor must assess his/her financial situation to determine his/her financial goals. An FD account has been the popular choice of investment for most conservative investors since it eliminates the market risk and ensures a guaranteed return irrespective of market condition, however, there are various other investment options that offer a higher return based on the risk appetite of the investors. Before making an investment decision, investors are advised to compare various types of FDs and other investment option to make a better decision. The tax benefits are based on the current tax rules which are subject to change.

Fixed Deposit Return Calculator: