What is a Fixed Deposit?

FD stands for Fixed Deposit, a type of fixed-return investment where you invest a lump sum amount for a fixed tenure with a bank, NBFC, or post office. The deposited amount earns interest over time on the rate of interest determined at the time of investment. It is one of the most traditional and secure methods of investment, which helps you grow money over time without much risk. It is a good way to earn a steady income and save for your future. Since the deposit is made for a fixed tenure, it is also called a term deposit.

A fixed deposit is a guaranteed return investment option offered by banks, Non-Banking Financial Companies and India Post Office. It allows you to make a one-time lump-sum investment for a pre-determined period of time and earn interest at a higher rate than a bank or post office savings account.:

The time period for an FD can range from 7 days to 10 years. Once you make the deposit with your bank, it starts earning an interest depending on the duration of the deposit.The main rule of a Fixed Deposit is that the money can be withdrawn before maturity.However, on opting for premature withdrawal of FD, you will be charged a penalty..

Fixed deposit offers you flexibility in choosing its time period. In other words, it can be opened for as long as you have idle funds

Some banks offer a premature withdrawal facility, but this leads toa lower rate of interest.

On the date of maturity, the bank credits the principal amount and interest to the account holder's bank account.

You must know the type of investment and understand its offerings before investing your money. Hence, it is important to understand what is a fixed deposit and also calculate the amount to be invested and the interest you will earn using an FD calculator to help you make a wise decision.

Before you set aside an amount for your Fixed deposit, you must know about the different types of fixed deposits which are available in the market. Read to know more:

In the above section, we have discussed the different types of fixed deposit meanings. Now you should also be aware of the key features of a fixed deposit to effectively understand what is a fixed deposit and if it is suitable for you:

• The amount can be deposited only once. If you wish to make additional deposits, you should start a new Fixed deposit.
• The rate of interest is higher than the savings account.
• The duration ranges anywhere between 7 days and 10 y
• Fixed deposits can be renewed without any hassle.
• Withdrawals cannot be made before the maturity period. In case of an emergency withdrawal, a penalty must be paid by the account holder.

Now that you know the fixed deposit meaning and its features, read along to know the several benefits it offers:

Now that we know 'what is a fixed deposit?', let us see how you can open one. The Fixed Deposit account can be opened both online and offline.

The interest you earn on your fixed deposit is taxable. First, it is added to your income and then taxed at the slab rates that apply to your income. You must declare it on your tax return under the category 'Income from other sources'.

It is important to remember that TDS is withdrawn only when the FD interest rate is credited and not when the FD matures. Therefore, if you have a 3 year FD, the tax on the FD will be deducted at the end of every year.

Banks deduct tax at source (TDS) when crediting interest to your account if the amount of interest exceeds ₹40,000. But the limit for senior citizens is ₹50,000.

What is a Fixed Deposit? – It is a reliable investment to preserve and grow your savings. The rate of interest on your fixed deposit depends on the tenure and the frequency of payouts.

The interest of FD can be calculated using the following formula: -

A = P(1 + r/n)^n*t

Where,

A: Maturity amount

P: Principal amount

r: rate of interest

n: compound interest frequency

t: Number of years

The interest payout of fixed deposit's maturity depends on the rate prorated by the bank and the frequency of payouts. The interest of principal amount is calculated either as simple interest or compound interest. The amount payable at the end of maturity Is higher in the case of compound interest as interest is calculated on the principal after every compounded.

The following entities are eligible to open a Fixed Deposit account in India: -

• Indian residents
• NRI
• Minors
• Senior Citizens
• Partnership Firms
• Companies
• Societies and Clubs
• Sole proprietorship
• Individuals or Joint investors

As we come close to answering the question – ‘What is a fixed deposit?’, you might think whether a saving plan can truly help in improving your financial portfolio.

Here are some tips on how a fixed deposit can help you do that: