FAQs about fixed deposits

Need a crash course on opening a Fixed Deposit account? Here’s how to get the best investment plan with high returns

FAQs about fixed deposits

When it comes to financial instruments, Fixed Deposits (FDs) are quite a popular investment. They can help save for the future while offering tax benefits as well. FD is a prudent investment with high returns. Whether you plan to invest for the short- or long-term, you can certainly consider FDs. 

Listed below are frequently asked questions regarding FDs that can help you make a more informed decision the next time you plan an investment. 

How does a Fixed Deposit account work?

You deposit a certain amount of money with a bank /non-banking institution for a fixed tenure and at a fixed rate of interest. You then receive interest on a monthly, quarterly or annual basis for this tenure. Once the tenure ends, the principal amount, along with the interest earned on it is returned to you.

What are the kinds of FDs available?

There are two kinds of Fixed Deposits: 

Cumulative Fixed Deposit

  1. Interest is compounded annually
  2. You receive the interest at the time of maturity, along with your principal amount 
  3. The interest earned here is taxable. (10% if the interest amount is more than 10,000 in a year). Your tax liability also depends on the tax slab in which you fall. 

Non-cumulative

  1. You receive the interest on a monthly/quarterly/half-yearly/yearly basis, depending on your preference

How to calculate tax on fixed deposit interest income?

Any interest income you receive is added to your total income while filing Income Tax Returns. It is calculated yearly, regardless of when it is paid out. The TDS will depend on your bank’s term and the tax slab which is applicable to you. Additionally, any TDS that has been deducted, will be adjusted against your final tax liability.

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What is the minimum period of fixed deposit investments?

The tenure range depends on the type of investment; ranging from seven days to 10 years.

What is the minimum and maximum amounts you can invest in an FD?

In principle, there is no limit to how much amount can be deposited in a fixed deposit. The minimum amount can be as low as Rs. 10,000 or as high as Rs. 1 crore. For investments over Rs 1 crore, the banks may have a separate interest rate reckoner.

What is the approximate range of FD interest rate in India?

In India, banks FD interest rate can range from 5% to 9%. Fixed deposit interest rates and extra facilities vary from bank to bank. FD is an investment with a higher rate of interest than liquid debt funds and banks savings account, to name a few.

How is the FD interest amount paid?

You could opt for monthly interest on FD or for longer intervals such as quarterly, half-yearly, yearly or on maturity basis. It can be paid by two methods – either by cheque or through the Electronic Clearing System (ECS). 

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​Can I withdraw FD money before maturity?

Yes. Either some part of the amount or the entire amount can be withdrawn by breaking the FD. However, if you close your FD in this situation, your bank may pay you 0.5% or 1% less, as a penalty for taking the money out before maturity. Also, the applicable interest rate will correspond with the tenure for which the deposit has been held.

What are the tax benefits associated with FD?

The interest that you receive on FDs are taxable. However, you can submit Form 15G (or 15H for senior citizens) to your bank to avoid paying tax on FDs. This condition only applies if you meet certain conditions such as:

  1. Total taxable income is below zero
  2. You are an HUF or individual 
  3. You must be an Indian national
  4. Your total, annual interest income is lower than the minimum exemption limit for the year (Rs. 2.5 lakh, currently)

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Can I take a loan against my FD?

Yes. You can apply for a loan against your FD for up to 70% to 90% (may vary) of the principal amount. Known as an overdraft (OD) facility, the interest on this loan is usually 1% to 2.5% more than the interest paid on your FD. Most banks offer loans for a minimum of Rs 25,000 as an OD and this usually does not attract any pre-payment penalty.

What documents are required for opening an FD Account?

Identity proof, Address proof, and passport size photographs are all you need to open an FD account. If your KYC is complete with the bank, you need not provide any additional documents.

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What eligibility criteria do I have to meet to apply for an FD?

Any resident individual, irrespective of age is eligible to invest in a Fixed Deposit. Hindu Unified Family (HUF), private or public limited companies, societies, and partnership firms can also open FD accounts. 

Deposits for minors are accepted under the name of his/her parent or legal guardian. In these cases, the parent or guardian signs the application form on behalf of the minor. 

What is the interest rate on bank FD for senior citizens?

Many banks offer special rates for senior citizens, which tend to be slightly higher. An additional markup for Senior Citizen could range from 0.5% to 0.75% for deposits from 1 year and above. It also helps in tax deduction, which can be claimed under 80C of the IT Act. 

Along with resident Indians, NRIs can also open FDs, through NRE (Non-Resident External) or NRO (Non-Resident Ordinary) accounts. The limits for this scheme can start from Rs 1 crore and above, and may vary from bank to bank. 

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Are there any tax deductions available on FD under section 80C?

Fixed deposits are a great investment option for risk-averse investors. But they can also help in saving taxes. Particularly known as tax saving fixed deposits, they usually come with a 5-year maturity period.

Regardless of your tax bracket, you can get tax deductions of up to Rs. 1.5 lakhs per year under Section 80C of the Income Tax Act. You can also open an individual or joint account for tax saving FDs. In case of a joint account, only the primary holder receives tax benefits.

However, it is important to note that interest earned on FDs is tax-free, albeit, up to a certain limit. When it crosses this limit specified by the Income Tax Act, taxes become applicable because the amount is considered as financial income. 

How can I invest in FD?

There are various modes you could use to invest in a FD. You could walk into a branch and sign an auto-debit form that transfers the funds from your bank account to the FD. Alternatively, you could use your banks app or phone banking service (if you are registered for it) and provide relevant instructions. Some banks even allow you to make investments via their ATMs.

Here is a guide to make an FD

Offline procedure to apply for FD:

  1. Visit your bank and get the FD application form
  2. Fill in the necessary details carefully
  3. Sign the form wherever required
  4. Arrange the documents required by the bank
  5. Attach the required documents to your application form
  6. Submit the form along with the FD amount cheque or auto debit approval to the bank

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Online procedure to apply for FD:

  1. Visit your bank's website and click on "Create Fixed Deposit"
  2. Fill the online application form carefully
  3. Submit the form online
  4. Upon submission, the FD amount filled by you will be debited from your savings account, and your FD account will be opened instantly
  5. You will receive the details on your registered Email ID
  6. In case the bank does not have your Email ID, the details will be mailed to your communication address

Note that the online procedure may vary from one bank to another.

What is sweep-in facility? 

The sweep-in facility links your savings/current account to your FD account, also known as savings cum fixed deposit. It gives you the liberty to decide the minimum balance for your savings account. 

FD counts among the best investment plans with high returns. It is safe and secure with assured growth. Check and compare FD interest rates provided by various banks before you make an investment.

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