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A fixed deposit (FD) is a
financial instrument Financial instruments are monetary contracts between parties. They can be created, traded, modified and settled. They can be cash (currency), evidence of an ownership interest in an entity or a contractual right to receive or deliver in the form ...
provided by banks or NBFCs which provides investors a higher rate of
interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
than a regular savings account, until the given maturity date. It may or may not require the creation of a separate account. It is known as a term deposit or time deposit in
Canada Canada is a country in North America. Its ten provinces and three territories extend from the Atlantic Ocean to the Pacific Ocean and northward into the Arctic Ocean, covering over , making it the world's second-largest country by to ...
,
Australia Australia, officially the Commonwealth of Australia, is a sovereign country comprising the mainland of the Australian continent, the island of Tasmania, and numerous smaller islands. With an area of , Australia is the largest country by ...
,
New Zealand New Zealand ( mi, Aotearoa ) is an island country in the southwestern Pacific Ocean. It consists of two main landmasses—the North Island () and the South Island ()—and over 700 smaller islands. It is the sixth-largest island coun ...
, fixed deposit in
India India, officially the Republic of India (Hindi: ), is a country in South Asia. It is the List of countries and dependencies by area, seventh-largest country by area, the List of countries and dependencies by population, second-most populous ...
and the
United States The United States of America (U.S.A. or USA), commonly known as the United States (U.S. or US) or America, is a country Continental United States, primarily located in North America. It consists of 50 U.S. state, states, a Washington, D.C., ...
, and as a
bond Bond or bonds may refer to: Common meanings * Bond (finance), a type of debt security * Bail bond, a commercial third-party guarantor of surety bonds in the United States * Chemical bond, the attraction of atoms, ions or molecules to form chemical ...
in the
United Kingdom The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and ...
and for a fixed deposit is that the money cannot be withdrawn from the FD as compared to a
recurring deposit A recurring deposit is a special kind of term deposit offered by Indian banks which help people with regular incomes to deposit a fixed amount every month into their recurring deposit account and earn interest at the rate applicable to fixed depos ...
or a
demand deposit Demand deposits or checkbook money are funds held in demand accounts in commercial banks. These account balances are usually considered money and form the greater part of the narrowly defined money supply of a country. Simply put, these are depo ...
before maturity. Some banks may offer additional services to FD holders such as loans against FD certificates at competitive interest rates. It's important to note that banks may offer lesser interest rates under uncertain economic conditions. The interest rate varies between 4 and 7.50 percent. The tenure of an FD can vary from 7, 15 or 45 days to 1.5 years and can be as high as 10 years. These investments are safer than Post Office Schemes as they are covered by the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, DICGC guarantees amount up to 500000(about $6850) per depositor per bank. They also offer
income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Ta ...
and
wealth tax A wealth tax (also called a capital tax or equity tax) is a tax on an entity's holdings of assets. This includes the total value of personal assets, including cash, bank deposits, real estate, assets in insurance and pension plans, ownershi ...
benefits.


Functioning

Fixed deposits are high-interest-yielding term deposits and are offered by banks.The most popular form of term deposits are fixed deposits, while other forms of term deposits are
recurring deposit A recurring deposit is a special kind of term deposit offered by Indian banks which help people with regular incomes to deposit a fixed amount every month into their recurring deposit account and earn interest at the rate applicable to fixed depos ...
and Flexi Fixed deposits (the latter is actually a combination of demand deposit and fixed deposit). To compensate for the low liquidity, FDs offer higher rates of interest than saving accounts. The longest permissible term for FDs is 10 years. Generally, the longer the term of deposit, the higher is the rate of interest but a bank may offer a lower rate of interest for a longer period if it expects interest rates, at which the Central Bank of a nation lends to banks ("repo rates"), will dip in the future. Usually the interest on FDs is paid every three months from the date of the deposit (e.g. if FD a/c was opened on 15 Feb, the first interest installment would be paid on 15 May). The interest is credited to the customers' Savings bank account or sent to them by cheque. This is a ''Simple FD.'' The customer may choose to have the interest reinvested in the FD account. In this case, the deposit is called the ''Cumulative FD'' or compound interest FD. For such deposits, the interest is paid with the invested amount on maturity of the deposit at the end of the term. Although banks can refuse to repay FDs before the expiry of the deposit, they generally don't. This is known as a premature withdrawal. In such cases, interest is paid at the rate applicable at the time of withdrawal. For example, a deposit is made for 5 years at 8% but is withdrawn after 2 years. If the rate applicable on the date of deposit for 2 years is 5 percent, the interest will be paid at 5 percent. Banks can charge a penalty for premature withdrawal. Banks issue a separate receipt for every FD because each deposit is treated as a distinct contract. This receipt is known as the Fixed Deposit Receipt (FDR), which has to be surrendered to the bank at the time of renewal or encashment. Many banks offer the facility of automatic renewal of FDs where the customers do give new instructions for the matured deposit. On the date of maturity, such deposits are renewed for a similar term as that of the original deposit at the rate prevailing on the date of renewal.
Income tax An income tax is a tax imposed on individuals or entities (taxpayers) in respect of the income or profits earned by them (commonly called taxable income). Income tax generally is computed as the product of a tax rate times the taxable income. Ta ...
regulations require that FD maturity proceeds exceeding Rs 20,000 not to be paid in cash. Repayment of such and larger deposits has to be either by "A/c payee" crossed cheque in the name of the customer or by credit to the saving bank a/c or current a/c of the customer. Nowadays, banks give the facility of Flexi or sweep in FD, where in customers can withdraw their money through ATM, through cheque or through funds transfer from their FD account. In such cases, whatever interest is accrued on the amount they have withdrawn will be credited to their savings account (the account that has been linked to their FD) and the balance amount will automatically be converted in their new FD. This system helps them in getting their funds from their FD account at the times of emergency in a timely manner.


Benefits

* Customers can avail loans against FDs up to 80 to 90 percent of the value of deposits. The rate of interest on the loan could be 1 to 2 percent over the rate offered on the deposit. * Residents of India can open these accounts for a minimum of seven days. * Investing in a fixed deposit earns customers a higher interest rate than depositing money in a saving account. * Tax saving fixed deposits are a type of fixed deposits that allow the investor to save tax under Section 80C of the Income Tax Act.


Taxability

In India, tax is deducted at source by the banks on FDs if interest paid to a customer at any bank exceeds 10,000 in a financial year. This is applicable to both interest payable or reinvested per customer. This is called Tax deducted at Source and is presently fixed at 10% of the interest. With CBS banks can tally FD holding of a customer across various branches and TDS is applied if interest exceeds ₹ 10,000. Banks issue Form 16 A every quarter to the customer, as a receipt for Tax Deducted at Source. However, tax on interest from fixed deposits is not 10%; it is applicable at the rate of tax slab of the deposit holder. If any tax on Fixed Deposit interest is due after TDS, the holder is expected to declare it in Income Tax returns and pay it by himself. If the total income for a year does not fall within the overall taxable limits, customers can submit a Form 15 G (below 60 years of age) or Form 15 H (above 60 years of age) to the bank when starting the FD and at the start of every financial year to avoid TDS.


How bank FD rates of interest vary with Central Bank policy

In certain
macroeconomic Macroeconomics (from the Greek prefix ''makro-'' meaning "large" + ''economics'') is a branch of economics dealing with performance, structure, behavior, and decision-making of an economy as a whole. For example, using interest rates, taxes, an ...
conditions (particularly during periods of high inflation) a Central Bank adopts a tight
monetary policy Monetary policy is the policy adopted by the monetary authority of a nation to control either the interest rate payable for federal funds, very short-term borrowing (borrowing by banks from each other to meet their short-term needs) or the money s ...
, that is, it hikes the interest rates at which it lends to banks ("repo rates"). Under such conditions, banks also hike both their lending (i.e. loan) as well as deposit (FD) rates. Under such conditions of high FD rates, FDs become an attractive investment avenue as they offer good returns and are almost completely secure with no risk. These can be checked with the excess rates in the country.


See also

*
Certificate of deposit A certificate of deposit (CD) is a time deposit, a financial product commonly sold by banks, thrift institutions, and credit unions in the United States. CDs differ from savings accounts in that the CD has a specific, fixed term (often one, ...
* Deposit (finance) *
Recurring deposit A recurring deposit is a special kind of term deposit offered by Indian banks which help people with regular incomes to deposit a fixed amount every month into their recurring deposit account and earn interest at the rate applicable to fixed depos ...
* Savings account * Time deposit


References

{{reflist Banking in India Fixed income Interest-bearing instruments Investment in India Bank deposits