All about Fixed Deposits – The Fixed Income

As we all know, Fixed Deposits (FDs) are one of the most popular investment options in India, and hold a special place in the hearts of all Indians, and for good reason.So, what exactly is a Fixed Deposits?
A fixed deposit or FD is an investment option where you invest a lump sum with a bank, corporate, or NBFC for a specified period at a predetermined fixed interest rate. The deposited amount earns interest over the chosen tenure at a fixed rate. The interest rate on an FD is fixed when the account is opened and is not subject to market fluctuations; so they provide predictable returns. FD holders have the flexibility to receive the interest either monthly, quarterly, half-yearly, or annually, or it can be compounded annually, as per their preference.
Fixed deposits are considered a safe investment option because they offer predictable returns without the risk of capital loss. They also provide a higher interest rate than savings accounts until the maturity date, making them an attractive option for those looking for stable and predictable returns.

 
As per the SEBI survey, 95% of Indian families prefer investing in bank FDs as they are not market-linked instruments. An Indian invests an average of Rs. 4.25 lakh in Fixed Deposits—the numbers back this up too. According to Reserve Bank of India data, FDs of private sector banks have grown from Rs 39.52 trillion to Rs 33.43 trillion in the period from March 2023 to September 2023. Simultaneously, the term deposits of Public Sector Banks have risen to Rs 68.28 trillion from Rs 64 trillion during the same period
Why choose Fixed Deposits?

Why do investors prefer Fixed Deposits?
Let’s break down why Fixed Deposits are a popular choice among investors.

Stability and Assured Returns: Fixed Deposits are considered low-risk investments as they are not subject to market fluctuations. They provide predictable returns and the principal amount remains secure. When you invest in stocks or any other instruments, your returns depend on the overall performance of the markets. In contrast, fixed deposits offer assured returns because their interest rates are pre-determined, allowing investors to accurately calculate and anticipate their returns. You do not worry about your investments as you are going to earn reliable returns on your investments. Therefore, Fixed Deposits provide stability and security.
Flexible Tenures: FDs come with a range of tenure options, typically ranging from 7 days to as long as 10 years. Investors can choose a tenure depending on their preferred investment horizon. 
Multiple Options: Both banks and NBFCs offer FDs with competitive interest rates, providing investors with a wide range of choices. This enables investors to select an institution that aligns with their financial goals and liquidity requirements
Loan Against Fixed Deposit: Most lenders let you borrow funds against your fixed deposits. In times of urgent financial need, FD holders can avail of loans against them. So, you do not have to break the deposit prematurely, and at the same time, you do not lose out on interest income. 
Simple Application Process: Opening a fixed deposit account is a simple process, typically requiring minimal documentation. This simplicity attracts investors looking for a straightforward investment avenue, free from the complexities associated with other instruments.

Types of Fixed Deposits
Regular Fixed Deposits: 
These are the most common types of Fixed Deposits (FDs) that offer a fixed interest rate and a predetermined tenure. Investors can select the tenure based on their financial goals and liquidity needs. If you have a limited income and rely on the interest from bank deposits for your monthly expenses, this type of FD is ideal for you. You can receive interest payouts either monthly, quarterly, half-yearly, or annually. Thus, regular FDs provide stability and predictable returns.
Senior Citizen Fixed Deposits: 
These Fixed Deposits are designed for individuals aged sixty years or older, offering higher interest rates compared to regular FDs. These FD schemes offer an additional interest rate of approximately 0.50% over the regular rates. The tenures under this scheme are also flexible.
Flexi Fixed Deposits:
A flexi fixed deposit, as the name suggests, offers convenience and flexibility to customers. You can open an FD with an initial deposit of your choice and link it to your savings account. Moreover, you can set a limit for your savings account and if there are any excess funds, it will be transferred to the FD. Conversely, if your balance falls below the limit, the bank will liquidate a portion of your FD to maintain your balance. You have the flexibility to withdraw or deposit funds in the account without breaking the entire fixed deposit while earning. These types of FDs are beneficial during emergencies or when immediate funds are required.
Cumulative Fixed Deposits:
In a cumulative fixed deposit, the interest earned on the principal amount is reinvested and paid out together with the principal at the end of the tenure i.e. the interest is compounded at regular intervals and paid out along with the principal amount at maturity. This type of fixed deposit typically offers higher returns compared to regular fixed deposits and allows investors to maximize their overall returns. They are ideal for individuals who want to reinvest the interest earned. You’ll also benefit from the power of compounding, as the next year’s interest will be calculated on the principal plus the interest earned from the previous year.
Non-cumulative Fixed Deposits: 
In a non-cumulative fixed deposit, the interest earned on the principal is paid out at regular intervals, such as monthly, quarterly, half-yearly, or annually. This type of fixed deposit is ideal for individuals who need a regular income from their investments. However, the drawback of this fixed deposit is that you do not get interest on interest.
What are Corporate Fixed Deposits?
Corporate fixed deposits are term deposits that are provided by institutions such as non-banking financial companies (NBFCs) and companies that offer a fixed interest rate for a specified duration. Similar to banks, the RBI allows certain NBFCs to accept deposits offering fixed interest rates and tenures. These deposits are commonly referred to as company or corporate fixed deposits. Corporate fixed deposits usually span from a few months to a few years, providing a shorter investment horizon compared to some other options. Like bank fixed deposits, corporate FDs offer interest earnings and flexibility in choosing the investment amount and duration. 
How to choose the right Fixed Deposit?

Define your investment objective: Before investing in a fixed deposit, clarify your investment objectives, whether they involve long-term savings, generating short-term income, or maximizing tax benefits.
Research: Conduct thorough research on different banks and financial institutions offering fixed deposits.
Compare interest rates: Evaluate and compare the interest rates offered by various banks and financial institutions.
Look for flexibility: Seek fixed deposits that provide flexibility in terms of tenure, interest payout options, and provisions for premature withdrawals.
Provider soundness: Before investing, you should check the credit rating and financial position of the financial institution offering the fixed deposit.
Consider professional guidance: Consult with a financial advisor or investment specialist who can help you select the right fixed deposit that aligns with your investment objectives and risk tolerance.

Taxation on Fixed Deposits
The interest income from fixed deposits is subject to taxation. The bank deducts a certain amount of tax from the interest income earned on a fixed deposit before crediting it to the depositor’s account. It is then deposited to the Income-tax Department on a due date.
However, in the case of tax savings fixed deposits, you can utilize Section 80C to deduct Rs. 1.5 lakh from your taxable income. But to qualify for this, you need to choose a lock-in period of at least five years. Other restrictions also come with it. Therefore, it is advisable to go through the terms and conditions before investing in them.
How is interest income calculated?
Banks deduct tax at source (TDS) on interest credited to your account if the interest exceeds Rs. 40,000 (Rs. 50,000 for senior citizens). It’s noteworthy that TDS is deducted annually at the end of each year during the tenure of the FD, not necessarily at the time of maturity. Investors whose total income is lower than the taxable limit can submit Form 15G (for individuals) or 15H (for senior citizens) when opening an FD to exempt themselves from tax deductions.

If your age is 80 years or more: You can submit Form 15H only if your taxable income is below Rs.5 lakhs. 
If your age is between 60 and  80 years: As a senior citizen, you can submit Form 15H only if your taxable income is below Rs.3 lakhs. 
If your age is less than 60 years: If you are not a senior citizen, you can submit Form 15G only if your total income does not exceed Rs.2.5 lakhs

Conclusion
Summing up, fixed deposits offer a stable and secure investment option with assured returns and minimal risk, making it a superior option compared to other investment options. Whether you’re saving for short-term goals or looking to diversify your portfolio, FDs provide financial stability and peace of mind. Hence, opening a fixed deposit is a prudent decision with the various options that are available with The Fixed Income platform. So, why wait? Open your Fixed Deposit account with The Fixed Income now.
Disclaimer: Fixed Deposits is regulated by RBI.  Investments in debt securities/ municipal debt securities/ securitised debt instruments are subject to risks including delay and/ or default in payment. Read all the offer-related documents carefully.
FAQs
Q1. Is FD tax-free?
Ans: No, FDs are not tax-free. However, you can save tax if you opt for tax-saving fixed deposits, where you can claim a deduction of up to Rs. 1.5 lakh under section 80C of the Indian Income Tax Act, 1961.
Q2. Can I withdraw my FD prematurely?
Ans: Yes, you can withdraw your FD prematurely.
Q3. Is there a maximum amount in Fixed Deposit?
Ans: Usually, there is no maximum amount in Fixed Deposits but you can check with your financial institution if there is any cap on it.
Q4. Can I link my savings account with my FD?
Ans: Yes, with Flexi Fixed Deposits, you can link your savings account with FD.
Q5. Is there any special interest rate for senior citizens on Fixed Deposits?
Ans: Yes, senior citizens are offered an additional markup rate of 0.05%. However, this markup is at the discretion of the bank.
Q6. Is it possible to avail loan against Fixed Deposits?
Ans: Yes, it is possible to avail loan against Fixed Deposits.
Q7. Can NRIs open Fixed Deposits in India?
Ans: Yes, NRIs can open Fixed Deposits in India. Many banks offer curated FD schemes for NRIs, catering to their individualized needs