Fixed Deposit (FD) in India: Meaning, Types, Benefits & How to Open

Fixed Deposits (FDs) are one of the traditional investment options. Most risk-averse investors prefer investing in FD. When you invest in FDs, interest is accumulated over a fixed period of time upon the deposited amount. 

We have covered the following in this article:

• Meaning of Fixed Deposits
• Types of FDs offered by various banks
• Eligibility to open an FD
• Process to open a fixed deposit online and offline

What is a Fixed Deposit?

Fixed deposits are an investment instrument provided by banks and other financial institutions, such as Non-Banking Financial Institutions (NBFCs) and Housing Finance Companies (HFCs). 

Under this, investors would deposit a lump sum over a period. In turn, they would get a fixed rate of interest throughout the investment. The rate of interest provided on FDs is much higher than that of a regular savings bank account. Once the tenure of the deposit ends, investors can withdraw their investment. However, they have a choice of reinvesting their money for another term. 

Here is an overview of fixed deposits:

Features of Fixed Deposits

• Higher Interest Rates: FDs offer significantly higher interest rates than regular savings accounts.
• Higher Interest Rates for Senior Citizens: Senior citizens receive slightly higher returns (0.5% higher) than general citizens.
• Flexibility: Upon maturity, investors can withdraw their funds or reinvest for another term.
• Flexible Interest Payout: The return on investment is compounded periodically, and it may be monthly, quarterly, or annually.
• Investment Tenure: The investment tenure of FDs ranges from seven days to 10 years, and it varies across banks
• Wide Availability: FDs are available through all scheduled commercial banks, some NBFCs, and HFCs in India.
• Safety Checks: When investing with NBFCs or HFCs, review ratings from agencies like CRISIL to ensure the institution's reliability.
• Withdrawal Option: Partial or full withdrawals are permitted (with penalties).
• Tax Deduction: Taxpayers can invest in tax-saver FDs to save taxes under Section 80C.
• Reinvestment: Once the investment matures, investors can reinvest for another term.
• Loan Options: Loans against FDs are available against the deposited amount.

Types of Fixed Deposit

​Fixed deposit accounts can be distinguished into several categories based on the benefits offered by the account, the account holder type, and the purpose for which the account is opened. Here, we have listed down some types of FD accounts:

1. Regular FD Account

The regular FD account is for individuals aged less than 60 years. Its interest rates will be lower than those offered for senior citizens. The tenure of this account may range from 7 days to 10 years.

2. FD Account for Senior Citizens

This account is dedicated to senior citizens, i.e., individuals aged above 60 years. Such account holders get a higher interest rate than usual and can access the monthly interest payout option, which can be thought of as a means of covering the monthly expenses of senior citizens.

3. Corporate FD Account

Corporate firms get separate interest rates and deposit tenures with banks. Firms can deposit the excess funding or profits they have raised in such corporate FD accounts for the time being until they put the cash to use.

4. Tax-Saving FD Account

Many risk-averse individuals utilise tax-saving FD accounts with a minimum lock-in period of five years to save income tax. Such deposits gain tax deduction of up to Rs.1.5 lakh in a financial year under section 80C of the Income Tax Act, 1961 on the principal deposit amount. 

5. Cumulative Fixed Deposits

In this case, the interest gets accrued in the FD account over the deposit tenure and gets compounded every quarter or year. You will receive the principal plus interest components upon maturity of the FD account.

6. Non-Cumulative Fixed Deposits

Under this, interests are accrued and are paid out monthly, quarterly, half-yearly, or annually, as per the individual’s choice. It is a good option for pensioners looking for a regular source of income after their retirement.

NRI Fixed Deposits

Banks offer different types of FD accounts for Non-Resident Indians (NRIs), which are as follows:

1. NRO FD Account

A Non-Resident Ordinary (NRO) FD account can be opened by an Overseas Citizen of India (OCI), a Person of Indian Origin (PIO), and a Non-Resident Indian (NRI). Any income earned in INR can be deposited only in NRO FD accounts. 

2. NRE FD Account

Two or more NRIs can open a Non-Resident External (NRE) FD account. The account acts as the right way to convert the foreign currency earned outside India into Indian currency. Both the principal and interest from this account are completely repatriable. The interest income from this account is exempted from tax under Section 10(4) of the Income Tax Act.

3. FCNR FD Account

Foreign Currency Non-Repatriable (FCNR) FD accounts can be opened by NRIs and can deposit money earned overseas in India. The currencies generally accepted are US Dollars, Pounds Sterling, Euro, Japanese Yen, etc. The account allows you to retain your money in the same currency while earning good returns.

Who Should Invest in Fixed Deposit?

Fixed deposit accounts are an excellent investment vehicle for those investors who don’t want to bear any risk. If you wish to sustain the money over the years while growing wealth with steady returns, you can go for FD accounts.

Many pensioners who receive a lump sum from retirement can invest their money in FD accounts so that the monthly interest payout can be used for expenses.

Individuals can also set aside a lump sum for their children or minors so they can use the sum later for higher education. They can also use FD accounts if they are planning to build emergency funds, since they can be withdrawn anytime with minor penalties.

Eligibility Criteria for Fixed Deposit​

The following eligibility criteria are applicable to open an FD account in India. There may be additional criteria that are bank-specific.

• Individuals who are resident Indians
• Joint account by two or more Individuals
• Senior citizens
• Minors
• Non-Resident Indians (NRIs)
• Sole proprietorship
• Societies, trusts, clubs, associations, etc
• Religious and educational institutions
• Companies
• Partnership firms

How to Open Fixed Deposits?

Fixed deposits can be opened both online and offline: 

Online:

• Log in to the bank’s netbanking portal where you have an account or visit the bank’s website where you wish to open a fixed deposit account.
• Search for the ‘Fixed Deposit’ option.
• Select ‘Open FD’ or ‘Apply’ option.
• Duly fill in the online application form.
• Upload all the requested documents.
• Transfer the amount you would like to invest.

Offline:

• Visit the nearest branch of the bank or financial institution.
• Request the FD application form and duly fill it out with relevant details.
• Attach the requested documents, such as proof of identity and address, with the application form and submit them at the counter.
• Provide a cheque/ cash for the amount you want to invest.
• Your application will be processed, and the account will be opened as per the timelines specified by the bank/ financial institution.

Documents Required for FD Account Opening

• Proof of Identity (Any one of the following):
  • Passport
  • PAN card
  • Voter ID
  • Driver’s license
  • Aadhaar card
• Proof of Address  (Any one of the following):
  • Passport
  • Aadhaar card
  • Bank statement
• Proof of Date of Birth  (Any one of the following):
  • Birth certificate
  • Service discharge certificate
  • PAN card
  • Aadhaar card
  • Voter ID

Loan Against Fixed Deposit​

Most FDs provide the option to avail loans of up to 90% of the deposited amount. Consider that you have deposited Rs.1 lakh in a fixed deposit account with Bank B for a tenure of 3 years. Since you have made the deposit for a long period, the bank agrees to offer 6% p.a.

However, at the end of the first year, you have come across an emergency situation and need Rs.70,000. If you withdraw the deposit prematurely, you will be penalised and will not receive the expected returns.

In this scenario, the bank will suggest you take a loan on the FD instead of closing the deposit account. You can take a loan on the FD amount, utilise the money for the emergency, and pay it back before the account maturity. This allows the FD account to accrue interest as usual, and you also receive money to address the emergency at the same time.

Minimum Amount for Fixed Deposit​

Usually, the banks and other financial institutions prescribe a minimum amount to be paid to open a fixed deposit account. The minimum amount required to open a fixed deposit can range from Rs.1,000 to Rs.10,000, depending on the bank or the institute. Thus, check the minimum amount needed to open an FD from the bank’s website before filling out the FD opening application form. Usually, there is no upper limit on the maximum amount that can be deposited in an FD account.

What Does Lock-in Period Mean for FDs?

In the case of an FD account, the lock-in period is the same as the maturity period or deposit tenure. This means you cannot withdraw the amount deposited within this duration. Even if you do, it comes with a penalty.

When it comes to tax-saver FD schemes, you strictly cannot withdraw the funds within 5 years from the date of account opening. In the case of other FD schemes, premature withdrawal is still allowed with certain penalty terms defined at the time of opening the account. The terms may differ from bank to bank.

Advantages of FD

• FD returns are assured as they are not tied to the market.
• FD deposits are insured for up to Rs.1 lakh by the Reserve Bank of India (RBI).
• The accumulated interest can be credited according to the individual’s requirements, such as monthly, quarterly, or annually.
• An individual can claim tax deduction by investing in tax-saving fixed deposits of up to Rs.1.5 lakh in a financial year.
• In any financial emergency, individuals can borrow up to 90% of the deposited amount against their FDS.
• Investment is safe as banks and other financial institutions are always under the purview of the RBI.
• Compounded interest makes the investment grow at a much faster rate.
• Premature withdrawals are allowed, so individuals will always have a corpus to fall back on in times of crisis.

Limitations of FD

• Though the FD returns are safe and a particular return percentage is guaranteed, the concept hinders the possibility of earning higher returns.
• FD accounts come with a specific lock-in period chosen by the customers themselves. The investment can be liquidated before maturity only at the cost of a penalty on the promised interest rate, which is a loss.
• Though individuals choose a 5-year tax-saver FD account to save tax without investment risk, the returns from the account are taxable under the Income Tax Act.

Taxation on FD Earnings

You can take advantage of the income tax deduction provided under Section 80C of the Income Tax Act by investing up to Rs.1.5 lakh in a tax-saver fixed deposit account. The scheme ensures returns along with capital protection. However, you must note that the interest income from the FD account is fully taxable.

The tax liability is totally dependent on your total income for the financial year and the tax slab you fall into. The interest income falls under the head ‘Income from Other Sources’.

In addition, banks deduct tax at source (TDS) if the interest earned exceeds Rs.40,000 (Rs.50,000 for senior citizens) in a financial year across all the accounts held with the bank. A TDS certificate will be issued to confirm the details of the deduction.

Read here to know more about the taxation on FD returns.

FD Calculator

Utilise our easy-to-use FD calculator to check the returns you may receive when you invest a certain amount over a deposit tenure. Through the Cleartax FD calculator, you will get to know your FD maturity amount and the interest earned within seconds.

FD or ELSS – Which is the Best?

Take a look at the table to understand the difference between FD and Equity-Linked Savings Scheme (ELSS):

Difference Between Fixed Deposit and Recurring Deposit

The table below provides the difference between FD and Recurring Deposit:

Fixed deposits are an excellent investment vehicle for those investors who don’t want to bear any risk. The longer the tenure, the more returns are accumulated as the compounding phenomenon powers them. FDs are flexible as investors can prematurely withdraw a partial or full amount invested.