- Date : 02/08/2022
- Read: 9 mins
In India, bank fixed deposits are widely considered to be simple, stable, and safe. This article aims to demystify the bank deposit as an investment product and list some banks that pay the highest interest rates on fixed deposits.
Since April 2020, the Reserve Bank of India (RBI) has cut interest rates drastically to multi-year lows to lift the economy from the impact of COVID-19 and the resultant lockdowns. Based on the RBI action, banks have also lowered interest rates on deposits as well as loan products.
The best rates for Bank Fixed Deposits to invest in India include, State Bank of India with 6.80% interest rate for general citizens and 7.30% for senior citizens, Punjab National Bank which gives a one year interest rate of 6.80% for general citizens and 7.30% for senior citizens, IDFC First Bank with its one year interest rate of 6.75% for general citizens and 7.25% for senior citizens, IDBI Bank that provides a yearly interest rate of 6.75% for general citizens and 7.25% for senior citizens, etc.
Best interest rates on bank fixed deposits in India
Source: Respective bank websites
Note: The interest rate mentioned is as of 1st March 2023 and for 1-year FD
Fixed deposit interest rates offered by small finance banks (SFBs)
Consider these Bank Fixed Deposits that give you some of the best rates on your investments, including Utkarsh Small Finance Bank, that gives you 7.75% yearly interest rate for general citizens and 8.50% for senior citizens, Equitas Small Finance Bank giving you 7.70% interest for a year for general citizens and 8.20% for senior citizens, Ujjivan Small Finance Bank FD with 7.50% yearly interest for general citizens and 8.25% for senior citizens, etc.
Source: Respective bank websites
Note: The interest rate mentioned is as of 1st March 2023 and for 1-year FD
Bank fixed deposits – some FAQs
1) What is a bank fixed deposit?
A fixed deposit is an investment product offered by banks. The customer has to deposit a lumpsum amount (principal) with the bank for a fixed tenure. In return, the bank agrees to pay a specified interest rate per annum during the fixed deposit tenure. As specified by the customer, the bank pays the interest monthly, quarterly, half-yearly, yearly, or on maturity. The bank issues a fixed deposit receipt (FDR) to the customer. On maturity, the bank repays the principal to the customer.
Apart from banks, non-banking financial companies (NBFCs) and housing finance companies (HFCs) also offer fixed deposits to investors.
2) What are the risks involved regarding bank fixed deposits?
Some of the risks involved with bank fixed deposits are:
- Default risk: When a bank cannot repay the principal on fixed deposit maturity, it is known as default risk. It can happen in the event of bank failures. All bank deposits of up to Rs 5 lakh are insured for each customer of each bank. The deposits are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI. To protect yourself from the default risk, you should spread your fixed deposits (in batches of Rs 5 lakh) among different banks.
- Liquidity risk: Bank fixed deposits have a lock-in period for the specified tenure. Banks do allow partial or full premature withdrawal. However, a penalty is charged for this.
- Interest rate risk: The interest rates on a bank fixed deposit may go higher after you make the fixed deposit. In such cases, your fixed deposit will continue to earn the lower interest rate at which the FD was made.
- Reinvestment risk: When your fixed deposit matures, the interest rates could have moved lower. In that case, if you wish to renew your fixed deposit, you have no choice but to renew it at a lower rate.
- Inflation risk: If the inflation rate is lower than your fixed deposit rate, your real return will be positive. However, if the inflation rate is higher than your fixed deposit interest rate, your real return will be negative.
3) What is the process of investing in a fixed deposit?
You can invest in a fixed deposit with a bank with whom you have your savings account. If you don’t have a savings account with the bank, you can still open a fixed deposit, but you have to complete the Know Your Customer (KYC) procedure.
For opening a fixed deposit with the bank, you have to fill the fixed deposit application form with all the required details such as the amount, tenure, interest rate, frequency of interest payment, maturity instructions, etc. You can pay the fixed deposit amount in cash, cheque, debit from a savings account, etc.
Once the fixed deposit is booked in the system, the bank will issue a Fixed Deposit Receipt (FDR).
4) What is the minimum amount required for making a bank fixed deposit?
Most banks have fixed the minimum amount for making a fixed deposit at Rs 1000. However, in the case of some banks, the minimum amount required is higher.
5) Are there any tax benefits available at the time of investing in a fixed deposit?
You can avail of tax benefits by investing in a 5-year tax-saving bank fixed deposit. In a financial year, a deduction of up to Rs 1,50,000 from taxable income can be availed of under Section 80C of the IT Act.
6) Is the fixed deposit interest amount taxable?
Yes, the interest amount paid on a bank fixed deposit is taxable. The interest amount is added to your overall income and taxed as per the income tax slab that you fall in.
7) Is there a TDS deduction on the interest amount?
Yes, if the interest amount on the fixed deposit exceeds a specified amount in a financial year, the bank will deduct TDS on the interest amount at the rate of 10%. As per current rules, a bank will deduct TDS if the interest amount in a financial year exceeds Rs. 50,000 for senior citizens and Rs. 40,000 for other individuals. However, after all deductions and exemptions, if your taxable income is below the minimum threshold, you can claim exemption from TDS. If you are a senior citizen, you need to submit Form 15H for TDS exemption. All other individuals need to submit Form 15G for TDS exemption.
8) Do banks pay differential rates on fixed deposits? What are the criteria?
Yes, banks do pay differential rates on fixed deposits. Some of the criteria for this include:
- Deposit tenure: Most banks usually pay a higher interest rate for a higher tenure. For example, a deposit with a tenure of less than 1 year will have a lower interest rate than a deposit with a tenure of 1-3 years.
- Deposit amount: Some banks pay a higher interest rate for a higher amount. For example, a deposit of less than Rs 2 crore will have a lower interest rate than a deposit that exceeds Rs 2 crore.
- Senior citizens: Most banks pay a higher interest rate (0.25%-0.75%) for senior citizens. Some banks also pay a higher interest rate for women.
- Online fixed deposits: Some banks pay a slightly higher interest rate for fixed deposits that are opened online, either through internet banking or the mobile app.
- COVID-19 vaccination: Some banks like the Central Bank of India are offering higher interest rates for individuals who have taken the COVID-19 vaccination.
9) Are bank fixed deposits safe?
Usually, bank deposits are considered safe as there are very few instances of bank failures in India. However, in the last few years, some private and cooperative banks have either failed or come to the brink of failure. So, all bank deposits are insured to protect depositors against such bank failures.
All deposits of all individuals with all banks are insured up to Rs 5 lakh. The Rs 5 lakh insurance amount for each customer of each bank includes savings, fixed deposits, and recurring deposits. The deposits are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI. In case a bank fails, the depositor can claim the deposit insurance from DICGC.
A depositor should spread deposits beyond Rs 5 lakh across different banks as a risk mitigation measure.
10) Can I break my fixed deposit prematurely?
Yes, most banks allow depositors to break fixed deposits prematurely. However, the bank may levy a penalty for partial or full premature withdrawal. You cannot do premature withdrawal from a tax-saving fixed deposit.
11) What is the difference between a cumulative and non-cumulative fixed deposit?
When you opt for the entire interest to be paid on maturity along with the principal, it is known as a cumulative fixed deposit. When you opt for periodic interest payments, such as monthly, quarterly, semi-annually, or annually, it is known as a non-cumulative fixed deposit. The monthly interest payment is useful for people desiring a regular income.
12) Can a loan be taken against a fixed deposit?
Yes, you can take a loan against the security of the fixed deposit. You will get a loan against a fixed deposit from the same bank with whom you have a fixed deposit. Banks usually provide a loan for up to 80%-90% of the fixed deposit amount. You cannot take a loan against a tax-saving fixed deposit.
13) What are the benefits of a bank fixed deposit?
There are many advantages of a bank fixed deposit. Some of these are:
- Fixed returns: A bank fixed deposit provides fixed returns. The interest rate is specified at the time of making the fixed deposit. During the entire tenure of the fixed deposit, the interest rate remains constant.
- Flexibility: A fixed deposit comes with a lot of flexibility. You can decide the amount you wish to deposit, the tenure for which you wish to deposit, the frequency of interest payment, etc.
- No additional cost: There is no cost for opening a fixed deposit, no recurring charges to maintain it, and no fees for closing it.
- Safety: A bank fixed deposit is a safe product. The DICGC insures the deposit amount up to Rs 5 lakh.
- Liquidity: You can make a partial or complete premature withdrawal from a bank fixed deposit. However, the bank may charge a small penalty for it.
14) What happens on the maturity of the fixed deposit?
On the maturity of the fixed deposit, the maturity amount is transferred to your savings account, or the fixed deposit is auto-renewed, depending on the instructions you have given the bank.
Since April 2020, the Reserve Bank of India (RBI) has cut interest rates drastically to multi-year lows to lift the economy from the impact of COVID-19 and the resultant lockdowns. Based on the RBI action, banks have also lowered interest rates on deposits as well as loan products.
The best rates for Bank Fixed Deposits to invest in India include, State Bank of India with 6.80% interest rate for general citizens and 7.30% for senior citizens, Punjab National Bank which gives a one year interest rate of 6.80% for general citizens and 7.30% for senior citizens, IDFC First Bank with its one year interest rate of 6.75% for general citizens and 7.25% for senior citizens, IDBI Bank that provides a yearly interest rate of 6.75% for general citizens and 7.25% for senior citizens, etc.
Best interest rates on bank fixed deposits in India
Source: Respective bank websites
Note: The interest rate mentioned is as of 1st March 2023 and for 1-year FD
Fixed deposit interest rates offered by small finance banks (SFBs)
Consider these Bank Fixed Deposits that give you some of the best rates on your investments, including Utkarsh Small Finance Bank, that gives you 7.75% yearly interest rate for general citizens and 8.50% for senior citizens, Equitas Small Finance Bank giving you 7.70% interest for a year for general citizens and 8.20% for senior citizens, Ujjivan Small Finance Bank FD with 7.50% yearly interest for general citizens and 8.25% for senior citizens, etc.
Source: Respective bank websites
Note: The interest rate mentioned is as of 1st March 2023 and for 1-year FD
Bank fixed deposits – some FAQs
1) What is a bank fixed deposit?
A fixed deposit is an investment product offered by banks. The customer has to deposit a lumpsum amount (principal) with the bank for a fixed tenure. In return, the bank agrees to pay a specified interest rate per annum during the fixed deposit tenure. As specified by the customer, the bank pays the interest monthly, quarterly, half-yearly, yearly, or on maturity. The bank issues a fixed deposit receipt (FDR) to the customer. On maturity, the bank repays the principal to the customer.
Apart from banks, non-banking financial companies (NBFCs) and housing finance companies (HFCs) also offer fixed deposits to investors.
2) What are the risks involved regarding bank fixed deposits?
Some of the risks involved with bank fixed deposits are:
- Default risk: When a bank cannot repay the principal on fixed deposit maturity, it is known as default risk. It can happen in the event of bank failures. All bank deposits of up to Rs 5 lakh are insured for each customer of each bank. The deposits are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI. To protect yourself from the default risk, you should spread your fixed deposits (in batches of Rs 5 lakh) among different banks.
- Liquidity risk: Bank fixed deposits have a lock-in period for the specified tenure. Banks do allow partial or full premature withdrawal. However, a penalty is charged for this.
- Interest rate risk: The interest rates on a bank fixed deposit may go higher after you make the fixed deposit. In such cases, your fixed deposit will continue to earn the lower interest rate at which the FD was made.
- Reinvestment risk: When your fixed deposit matures, the interest rates could have moved lower. In that case, if you wish to renew your fixed deposit, you have no choice but to renew it at a lower rate.
- Inflation risk: If the inflation rate is lower than your fixed deposit rate, your real return will be positive. However, if the inflation rate is higher than your fixed deposit interest rate, your real return will be negative.
3) What is the process of investing in a fixed deposit?
You can invest in a fixed deposit with a bank with whom you have your savings account. If you don’t have a savings account with the bank, you can still open a fixed deposit, but you have to complete the Know Your Customer (KYC) procedure.
For opening a fixed deposit with the bank, you have to fill the fixed deposit application form with all the required details such as the amount, tenure, interest rate, frequency of interest payment, maturity instructions, etc. You can pay the fixed deposit amount in cash, cheque, debit from a savings account, etc.
Once the fixed deposit is booked in the system, the bank will issue a Fixed Deposit Receipt (FDR).
4) What is the minimum amount required for making a bank fixed deposit?
Most banks have fixed the minimum amount for making a fixed deposit at Rs 1000. However, in the case of some banks, the minimum amount required is higher.
5) Are there any tax benefits available at the time of investing in a fixed deposit?
You can avail of tax benefits by investing in a 5-year tax-saving bank fixed deposit. In a financial year, a deduction of up to Rs 1,50,000 from taxable income can be availed of under Section 80C of the IT Act.
6) Is the fixed deposit interest amount taxable?
Yes, the interest amount paid on a bank fixed deposit is taxable. The interest amount is added to your overall income and taxed as per the income tax slab that you fall in.
7) Is there a TDS deduction on the interest amount?
Yes, if the interest amount on the fixed deposit exceeds a specified amount in a financial year, the bank will deduct TDS on the interest amount at the rate of 10%. As per current rules, a bank will deduct TDS if the interest amount in a financial year exceeds Rs. 50,000 for senior citizens and Rs. 40,000 for other individuals. However, after all deductions and exemptions, if your taxable income is below the minimum threshold, you can claim exemption from TDS. If you are a senior citizen, you need to submit Form 15H for TDS exemption. All other individuals need to submit Form 15G for TDS exemption.
8) Do banks pay differential rates on fixed deposits? What are the criteria?
Yes, banks do pay differential rates on fixed deposits. Some of the criteria for this include:
- Deposit tenure: Most banks usually pay a higher interest rate for a higher tenure. For example, a deposit with a tenure of less than 1 year will have a lower interest rate than a deposit with a tenure of 1-3 years.
- Deposit amount: Some banks pay a higher interest rate for a higher amount. For example, a deposit of less than Rs 2 crore will have a lower interest rate than a deposit that exceeds Rs 2 crore.
- Senior citizens: Most banks pay a higher interest rate (0.25%-0.75%) for senior citizens. Some banks also pay a higher interest rate for women.
- Online fixed deposits: Some banks pay a slightly higher interest rate for fixed deposits that are opened online, either through internet banking or the mobile app.
- COVID-19 vaccination: Some banks like the Central Bank of India are offering higher interest rates for individuals who have taken the COVID-19 vaccination.
9) Are bank fixed deposits safe?
Usually, bank deposits are considered safe as there are very few instances of bank failures in India. However, in the last few years, some private and cooperative banks have either failed or come to the brink of failure. So, all bank deposits are insured to protect depositors against such bank failures.
All deposits of all individuals with all banks are insured up to Rs 5 lakh. The Rs 5 lakh insurance amount for each customer of each bank includes savings, fixed deposits, and recurring deposits. The deposits are insured by Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI. In case a bank fails, the depositor can claim the deposit insurance from DICGC.
A depositor should spread deposits beyond Rs 5 lakh across different banks as a risk mitigation measure.
10) Can I break my fixed deposit prematurely?
Yes, most banks allow depositors to break fixed deposits prematurely. However, the bank may levy a penalty for partial or full premature withdrawal. You cannot do premature withdrawal from a tax-saving fixed deposit.
11) What is the difference between a cumulative and non-cumulative fixed deposit?
When you opt for the entire interest to be paid on maturity along with the principal, it is known as a cumulative fixed deposit. When you opt for periodic interest payments, such as monthly, quarterly, semi-annually, or annually, it is known as a non-cumulative fixed deposit. The monthly interest payment is useful for people desiring a regular income.
12) Can a loan be taken against a fixed deposit?
Yes, you can take a loan against the security of the fixed deposit. You will get a loan against a fixed deposit from the same bank with whom you have a fixed deposit. Banks usually provide a loan for up to 80%-90% of the fixed deposit amount. You cannot take a loan against a tax-saving fixed deposit.
13) What are the benefits of a bank fixed deposit?
There are many advantages of a bank fixed deposit. Some of these are:
- Fixed returns: A bank fixed deposit provides fixed returns. The interest rate is specified at the time of making the fixed deposit. During the entire tenure of the fixed deposit, the interest rate remains constant.
- Flexibility: A fixed deposit comes with a lot of flexibility. You can decide the amount you wish to deposit, the tenure for which you wish to deposit, the frequency of interest payment, etc.
- No additional cost: There is no cost for opening a fixed deposit, no recurring charges to maintain it, and no fees for closing it.
- Safety: A bank fixed deposit is a safe product. The DICGC insures the deposit amount up to Rs 5 lakh.
- Liquidity: You can make a partial or complete premature withdrawal from a bank fixed deposit. However, the bank may charge a small penalty for it.
14) What happens on the maturity of the fixed deposit?
On the maturity of the fixed deposit, the maturity amount is transferred to your savings account, or the fixed deposit is auto-renewed, depending on the instructions you have given the bank.
