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Are you looking for a savings option that offers guaranteed returns for complete peace of mind? A fixed deposit could be the best choice. FDs keep your money safe and offer fixed returns with stable growth.

While fixed deposits are one of the easiest investments, there are many things to know before opening one. Let’s understand what an FD is, how to get the best FD interest rates, and the benefits of applying online.

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What is a fixed deposit?

A fixed deposit is among the most popular savings options in India. It lets you invest a sum of money for a fixed period at a pre-determined interest rate. Since an FD is opened for a specified period (or term), it is also called a term deposit. The date when the term ends is called the maturity date.

Fixed deposit interest rates are usually higher than the interest rate offered on savings accounts. The FD interest rate may vary across banks. Not just that, it may vary depending on the term of the FD.

Understanding the relationship between fixed deposit terms & interest rates

Fixed deposits are available for different terms, ranging from a few days to several years. The interest rates for a shorter term are typically a little lower than those offered for longer terms. For example, an FD with a term of 7 days may offer an interest rate of 2.75% p.a., while an FD for a 2-year period could come with a 7.15% p.a. interest rate.

You may also notice that the interest rate for much longer periods is a little lower again. For instance, a 5-year FD may offer an interest rate of 6.2% p.a.. This is because fixed deposits guarantee the interest rate irrespective of the state of the economy and even if the Reserve Bank of India (RBI) reduces interest rates.

You can quickly compare interest rates for different terms online before selecting the fixed deposit maturity date.

What are the benefits and features of a fixed deposit?

• FDs offer fixed returns. This helps you plan better if you are investing for a specific goal, like a wedding or home renovation. 
• You can use FDs to plan for your retirement. 
• Your money remains safe, as FDs are not impacted by market risks.
• They typically offer higher returns than savings accounts.
• You can start with a small amount, as low as ₹5,000, and reinvest your money as it grows. 
• FDs offer liquidity. If you need money urgently, you can break the FD and withdraw money before the maturity date. Some charges may apply in this case. It’s good to find out these charges before opening an FD.
• You can get a credit card against a fixed deposit. Such a card is known as a secured credit card and does not require you to have a high credit score for approval.
• Fixed deposits help hedge risks in your investment portfolio, as they are not impacted by market volatility.
• Tax-saving FDs offer tax deductions of up to ₹1.5 lakhs for a financial year, under Section 80C of the Income Tax Act.
• Senior citizens are eligible for a higher interest rate ranging from 0.5% p.a. to 1% p.a. more than the regular interest rate.

You can easily open a fixed deposit online. If you want to close it, the money will be transferred directly to your linked savings account.

Different payout options on your fixed deposit

Do you want the interest to be added to the principal and paid out when the FD matures? This is called a cumulative FD. You can also set up the FD to pay the interest at regular intervals. This is a non-cumulative FD.

Here are the features of both:

Cumulative fixed deposits

• Interest is paid at the time of maturity.
• Earns the best FD interest rates. 
• You get the benefit of earning interest on both the principal and the accumulated interest.
• The term of a cumulative term deposit varies from 1 year to 10 years.

Non-cumulative fixed deposits

• The interest is paid at the specified frequency. This could be quarterly or annually.
• The tenure of a non-cumulative fixed deposit also ranges from 1 year to 10 years.
• You earn interest only on the principal, as the interest is paid out.
• This kind of FD is a good option if you are looking for a passive income.

How is interest calculated on FDs?

When you apply for a fixed deposit, the total amount at maturity is disclosed right away. This is based on the principal you invest, interest rate offered, and tenure chosen. Wish to calculate the interest your FD will earn? The formula for calculating differs depending on the payout option you've chosen. So, even with the same principal and interest rate, the total interest that you earn may be different.

Simple interest is typically applied to non-cumulative fixed deposits. This is because the interest is paid out to you. So, interest is applied only to the principal. Compound interest is applied to cumulative fixed deposits. Here, interest is applied both to the principal and the accumulated interest.

Let’s say:

A = Maturity amount 
P = principal (amount you invest into the FD) 
I = Interest rate (mentioned as a percentage and on a per year basis) 
N = Number of times interest is applied 
T = Term (usually in years)

The formula for simple interest is: (P x I x T)/100

Here’s an example. Let’s assume you wish to start a fixed deposit of ₹50,000 for 5 years. The interest rate is 7% p.a. You want the interest to be paid out quarterly.

With simple interest, you will earn a total interest of: (₹50,000 x 7 x 5)/100 = ₹17,500

The formula for compound interest: A – P, where A = P x [(1 + I/N) ^ NT]

Let’s keep the principal, term, and interest rate the same as in the previous example. Assume you don't want any payout till maturity, and the interest is accrued quarterly.

First, we calculate the maturity amount. A = ₹50,000 x [(1 + 7/4) ^ (7x5)] = ₹70,738

This is the total amount you will receive on maturity. Deducting the principal from this gives you the total interest earned over 5 years:  ₹70,738.91 - ₹50,000 = ₹20,738.91

As you can see, with compound interest, you earn more. Apart from looking for the best FD interest rates, consider staying invested (instead of payouts) to maximise your earnings from the fixed deposit. Don’t wish to make these complex calculations? Simply use a fixed deposit calculator online to compare interest and maturity amounts. You can just input the principal, term and interest rate to know the maturity amount and the interest you will earn. The calculator does all the work and presents you with the results instantly.

How to choose the right fixed deposit?

Here are the factors to consider when choosing a fixed deposit:

Attractive interest rates: The main reason for opening an FD is to earn interest. Different banks offer varying interest rates and comparing them can get you the best FD interest rate.

Deposit tenure: Select the tenure that meets your financial goals, like your child's college fees or your next family holiday. Decide the tenure accordingly. You may choose the shortest tenure that gives you the best FD interest rate. This will reduce the chances of having to pay a penalty for breaking the fixed deposit before the maturity date.

Premature withdrawal option: Make sure that the FD does not have any lock-in period, and that you can close it whenever you need money. Some banks also allow partial withdrawals where you don’t need to break the whole FD, so the remaining part can still grow.

Flexible interest withdrawal: You can opt for an FD that allows the flexibility of monthly, quarterly and annual withdrawals in case you need a regular income from your investment.

Deposit amount: Choose a bank that allows you to start a regular fixed deposit with as low as ₹5,000.

Auto-renewal option: You can give standing instructions for your fixed deposit to be renewed on maturity. This prevents the hassle of creating a new FD when the previous maturity amount comes into your savings account. Do remember that the renewal may not be at the same interest rate. If you want more control over your money, you can opt out of auto-renewal.

Tax implications: The interest earned on your FD is added to your taxable income. Be sure to understand your tax liability and explore options to optimise your returns after tax deductions.

What is the process to open a fixed deposit?

You can easily open a fixed deposit online and offline with your preferred bank in a few simple steps.

Online process

Step 1: Visit the official website or download and open the app of your preferred bank.

Step 2: If you are an existing customer of the bank, login to your account.  If not, you will have to create your account.

Step 3: Visit the fixed deposit section.

Step 4: Enter the amount you wish to deposit and the tenure of your investment. You will have to update other details, such as the nominee’s name, address, contact details, etc.

Step 5: Confirm the details and make the payment online.

Step 6: Download your fixed deposit certificate.

Offline process

Step 1: Visit the nearest branch of your chosen bank to open a fixed deposit.

Step 2: Fill in the fixed deposit form. Enter the details such as name, address, contact details, amount, tenure, and nominee. Also, if you are an existing customer, you must provide your savings account details, such as your account number or customer ID.

Step 3: Attach the necessary documents such as Aadhaar card and PAN card.

Step 4: Fill in the deposit slip and deposit your investment amount at the cash counter.

Step 5: Attach the counterfoil slip with the form and submit it along with the KYC documents.

Step 6: After verifying the documents, the bank will open your FD account and send you an invoice via email.

Opening a fixed deposit online is paperless, quick, and hassle-free. You’ll receive the fixed deposit invoice within a few minutes.

How do you know if you are eligible for an FD?

Anyone in India can invest in fixed deposits. Whether you are a salaried individual, an NRI, a senior citizen, own a business, or a member of a HUF, you can benefit from this safe way of saving. You can even open an FD for a child as young as one year. For minors, a parent or guardian must open on their behalf.

Documents required for opening a fixed deposit account in India

You must complete the basic KYC (know your customer) process to open a fixed deposit. For this, you will need your proof of identity and address.

Proof of identity: PAN card, passport, voter identity card, driving license, or Aadhaar card.

Proof of address: Passport, voter ID card, driving license, or Aadhaar card.

Is fixed deposit interest taxable in India?

Interest on FDs is fully taxable and treated as ‘income from other sources’ when filing your ITR (income tax return). This means it becomes part of your gross income for the financial year.

Remember that there is TDS (tax deducted at source) on the interest paid by FDs. This means the bank will automatically deduct tax on the interest. This is done every year, instead of at maturity. So, the tax gets spread out, and you do not have to bear the burden all at once when the FD matures.

For example, let's say you have an FD for four years and you earn over ₹40,000 in interest annually. Instead of being hit by a tax bill of ₹16,000 at the end of the four years, the bank deducts TDS each year and pays ₹4,000 on your behalf.

TDS on interest is deducted only if your annual interest exceeds ₹40,000 (or ₹50,000 for senior citizens). If you earn more than this, provide your PAN card details. With your PAN card, the TDS rate is 10% p.a. on the interest earned. Without a PAN card, the rate jumps to 20% p.a. The complete tax payable will also depend on your income tax slab for that year.

Ready to invest in a fixed deposit? You can earn guaranteed returns without worrying about market fluctuations or how the economy is growing. Choose an FD with the best interest rates and a suitable tenure to meet your financial goals and turn your dreams into reality.