Fixed Deposit Guide
5 min read | 5 months ago
You must have already heard of a recurring deposit, which is a common financial product offered by multiple banks and financial institutions in India. These deposits are good ways to build up your savings over a period of time through what is known as the sheer power of compounding. But how are these interest rates calculated on RDs (the moniker for recurring deposits)? Here’s finding out.
What Is a Fixed Deposit?
A Fixed Deposit or FD is a specific form of investment which can be made at any stage in life. You have to make a deposit that will remain locked for the entire tenure (pre-fixed and chosen in advance) and you will earn interest on the same accordingly. There are no risks related to bank FD rates, since they are not dependent upon market conditions and fluctuations. This makes FDs some of the safest investments that can be chosen in the current scenario.
How Do Fixed Deposit Accounts Work?
When it comes to the workings of fixed deposit accounts, there are a few aspects that have to be understood at the outset. These include the following:
- The two parties for FDs are the bank and the customer, with the former requiring money to lend to borrowers in exchange for interest. This money is obtained from savings accounts, current accounts, FDs, etc.
- They offer higher rates of interest for FDs to customers and the difference between the same and loan interest rates is known as the spread, which indicates the earnings of the bank.
- If you want to invest in FDs, then you can choose from several options in terms of tenures. This may include a few days to a few months or even some years.
- The interest rates for smaller durations are lower as compared to FDs which have longer tenures.
- The rates of interest on FD usually vary, so customers should compare them before finalizing anything.
- Small finance banks sometimes offer higher interest rates in comparison to many public-sector or bigger banks.
- FDs have lower returns in most cases, as compared to equity and other investments, although they offer guaranteed returns with negligible risks.
What are the Advantages of Fixed Deposits?
Here are some of the benefits offered by fixed deposits for customers:
- FDs offer assured returns and interest rates which are fixed at the start of the tenure.
- The tenure options are flexible and customers can choose the same depending on their needs and financial goals.
- FDs can be renewed after their maturity period ends without any hassles.
- Customers can also choose monthly or quarterly payouts from their FDs in case they are looking to create an alternative income stream.
- The interest rates stay fixed throughout the entire tenure and do not change in response to rate cuts/increases during this period.
- Opening an FD is a seamless process at most banks.
What are the Types of Fixed Deposits?
Here are some of the kinds of fixed deposits that are usually available.
- Cumulative FD- In this case, the interest is calculated on the basis of quarterly compounding intervals/periods on deposits. It is paid at the rate fixed by the bank, based on the deposit tenure. The depositor can thus earn interest on the principal and interest components alike.
- Non-Cumulative FD- Interest does not accumulate in this scheme, but is rather paid out to the depositor at chosen intervals. This helps customers get passive income without any hassles.
- Tax-Saving FDs- There are tax-saver FDs that are offered by several banks and these have lock-in periods of five years. They have eligibility for tax deductions up to Rs. 1.5 lakh under Section 80C of the Income Tax Act.
- Flexi Fixed Deposit- There are some current and savings accounts across banks which come with auto sweep features. In this case, account balances above a specified limit are directed to flexi deposits (the principle of multiples of sweep out accounts is followed). Whenever the balance is low for clearing any debits, then the FFD is broken on the basis of the principle called LIFO (last in first out) based on the bank policy.
What Are the Features and Advantages of Fixed Deposits?
Here are some of the major features and benefits offered by fixed deposits-
- Completely safe- FD interest for senior citizens and customers of every age is completely safe. There is no dependence on market conditions or risks related to any other external factor.
- Attractive rates of interest- Nowadays, there are more competitive and rewarding bank FD rates, making these viable options to build your savings for the future.
- Flexible deposit options- You may start investing in FDs with amounts starting from as low as Rs. 1,000 and going up to Rs. 2 crore or even more.
- Senior citizen advantages- The FD interest for senior citizens is always lucrative, since it comes with an extra 0.5% per annum. This makes FDs some of the most trusted and reliable investment options for senior citizens.
- Choosing flexible tenures- There are a wide range of tenures, ranging from 7 days to even 10 years. This makes FDs perfect for almost any investment need.
Flexible interest withdrawals- You can choose to receive the entire interest on your FD at the time of maturity. At the same time, you can also opt for monthly or quarterly payouts.
- Overdraft options- You may avail of overdraft facilities against your fixed deposit for sudden liquidity requirements.
What Are the Features and Advantages of Fixed Deposits?
Here are some of the major features and benefits offered by fixed deposits-
Completely safe- FD interest for senior citizens and customers of every age is completely safe. There is no dependence on market conditions or risks related to any other external factor.
Attractive rates of interest- Nowadays, there are more competitive and rewarding bank FD rates, making these viable options to build your savings for the future.
Flexible deposit options- You may start investing in FDs with amounts starting from as low as Rs. 1,000 and going up to Rs. 2 crore or even more.
Senior citizen advantages- The FD interest for senior citizens is always lucrative, since it comes with an extra 0.5% per annum. This makes FDs some of the most trusted and reliable investment options for senior citizens.
Choosing flexible tenures- There are a wide range of tenures, ranging from 7 days to even 10 years. This makes FDs perfect for almost any investment need.
Flexible interest withdrawals- You can choose to receive the entire interest on your FD at the time of maturity. At the same time, you can also opt for monthly or quarterly payouts.
Overdraft options- You may avail of overdraft facilities against your fixed deposit for sudden liquidity requirements.
What Are the Eligibility Criteria for Fixed Deposits?
Are there any eligibility guidelines for fixed deposits? Here are the usual criteria used by banks.
- Resident Indians
- HUFs (Hindu Undivided Families)
- Trust Accounts
- Sole Proprietorship Firms
- Limited Companies
These are the categories of customers that may open FDs at banks.
What Documents Do You Require for Fixed Deposits?
Here are some of the documents that are required to open fixed deposits.
- You will require KYC documents to confirm your address and identity.
- These include your passport, driving license, Aadhar number, voter identity card, NREGA job card, letter from national population register, and so on.
- PAN Cards may be submitted as proof of identity in most cases.
What is the Process to Calculate Interest on Fixed Deposits?
Here is the process by which the interest is calculated on fixed deposits.
- Simple Interest (SI)-
The formula is P×R×T)/100.
Here, P is the principal, T is the time period (years), and I indicates the interest rate.
Suppose you invest Rs. 10,000 at 6% per annum for 3 years. Hence, applying this formula, the interest earned will be Rs. 1,800.
- Compound Interest (CI)
The formula is P {(1+i/100)n -1}. Here, P is the principal and n indicates the number of years, while i indicates the interest rate. You can use online calculators to work out the interest in this case. For example, if you invest Rs. 1 lakh yearly and stay invested for 5 years with an interest rate of 8% per annum, then you will get a sum of Rs. 1.47 lakh at maturity.
What Are the Interest Rates on FDs?
What are the bank FD rates that you can expect? Are there extra benefits in terms of FD interest for senior citizens? Let us take a look at the interest rates offered by Unity Bank in this case.
| Duration | General Interest Rate on FD | Interest Rate for Senior Citizens |
|---|---|---|
| 7-14 days | 4.50% | 4.50% |
| 15-45 days | 4.75% | 4.75% |
| 46-60 days | 5.75% | 6.25% |
| 61-90 days | 6% | 6.50% |
| 91-164 days | 6.25% | 6.75% |
| 165 days to 6 months | 6.25% | 6.75% |
| More than 6 months to 201 days | 8.75% | 9.25% |
| 202-364 days | 7.25% | 7.75% |
| 1 year | 7.85% | 8.35% |
| 1 year 1 day | 7.85% | 8.35% |
| More than 1 year 1 day to 500 days | 7.85% | 8.35% |
| 501 days | 8.75% | 9.25% |
| 502 days to 18 months | 7.85% | 8.35% |
| More than 18 months to 700 days | 7.90% | 8.40% |
| 701 days | 8.95% | 9.45% |
| 702-1000 days | 7.90% | 8.40% |
| 1001 days | 9% | 9.50% |
| 1002 days to 3 years | 8.15% | 8.65% |
| More than 3 years to 5 years | 8.15% | 8.65% |
| More than 5 years to 10 years | 7.50% | 8% |
It is worth noting that bank FD rates are subject to change periodically, depending on the bank policies.
What Is the Duration of FDs?
There are several options in terms of the duration for fixed deposits. It may start from 7 days and go up to a maximum of 10 years. In Unity Bank, you may choose tenures of 3, 5, or more years along with specific durations like 501 or 1001 days.
What Is the Amount for FDs?
You can begin investing in fixed deposits with amounts as low as Rs. 1,000. At the same time, you can invest up to a maximum of Rs. 2 crore in most cases. For investing more than this amount, you have to reach out to your nearest branch manager for the rates that are applicable.
What Is Overdraft on FDs?
An overdraft facility can be availed against fixed deposits for sudden liquidity requirements without necessarily breaking these investments. How does this work? You can get funds against the value of the FD. Rather than a loan, an overdraft is a line of credit that is linked to your FD account. You can withdraw up to the given limits and your requirements and then partly/fully repay the amount to your bank again. You only have to pay interest on the amount that is overdrawn in this case while there is usually a charge that you have to pay for this facility.
What is a Loan Against FD?
Some banks offer loans against fixed deposits of customers. These are secured loans where you will pledge your FD as the collateral for your loan and get a certain amount (usually a percentage of the FD between 75-95%) in return. If you default on loan repayment, then it will be deducted from your fixed deposit amount. Interest rates charged by the bank on the loan may vary, depending on the policies of the financial institution in question. The loan facility is available for all fixed deposit holders, with the exception of FDs which are in the name of minors. There are usually no processing charges or prepayment penalties applicable to loans against FDs.
What is the Taxation for FD Income?
Returns from fixed deposits are taxed as per the Income Tax Act. The interest income from the FD will come under the category called income from other sources. The customer will be taxed as per his/her tax slab. In case the interest earnings surpass Rs. 40,000 for regular customers or Rs. 50,000 for senior citizens, 10% TDS (tax deducted at source) is deducted by the bank automatically. The PAN details should be submitted to the bank in case the income from interest exceeds these amounts. If it is not given, then TDS of 20% will be deducted from the final interest amount. Thereafter, the earnings will be taxed based on the individual’s income tax slab.
What Are the Payout Options for FDs?
There are numerous payout options for fixed deposits. You can choose to get the interest payouts on a monthly or quarterly basis. You can even choose to get the entire sum at the time of maturity. Here is an example to help you understand the concept.
Suppose you invest an amount of Rs. 10 lakh for a period of 10 years at 6.9% to amass funds for making the down payment on your dream house in the future. This is how the interest payout will be for the following parameters:
Monthly Payouts- Rs. Rs. 5,750 per month (Rs. 16,90,000 in total maturity amount)
Quarterly Payouts-Rs. 17,250 per quarter (Rs. 16,89,543 in total maturity amount)
At Maturity with full compounding- Rs. 19,82,020
Hence, as you can see, keeping your money invested in FDs for the entire period will help you get a higher sum at maturity. However, you can also choose to set up an alternative income stream by choosing monthly or quarterly payouts, especially after retirement. You can choose to invest a major chunk of your money in FDs to offset the risks in your investment portfolio. The overdraft facility will help you get funding swiftly to meet emergencies as well.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
