How Fixed Deposit (FD) Works?

Fixed deposit is considered one of the best forms of investments because they ensure pre-scheduled return. It is a type of account with a bank where an account holder deposits a fixed amount for a specific period and gets a higher interest rate than he would have received over the savings bank account. Still, want to know more about what is fixed deposit? How does it work? What are the unique features? Here is a complete guide that will help you to get answers to all these questions.

Fixed Deposit – working criteria

When a customer deposits his money in a fixed deposit account, the entire amount gets locked for a pre-decided period. This means that the customer cannot withdraw the amount before this locked-in period unless he is willing to pay the penalty. After the completion of this fixed tenure, the customer gets the initial amount that he has invested and on top of that, he also receives the interest amount as per the rate promised by the bank at the time of making the deposit.

The most important features of FD are as follows that customers should know:

• Customers receive interest at the amount on a pre-decided tenure according to the rate of interest specified by the bank at the time of making the deposit. Senior citizens get a higher interest rate, usually 0.25% to 0.65%, than other investors on FD.
• This rate of interest does not change throughout the tenure because it remains unaffected by any changes taking place in the market.
• The interest earned over the deposited amount is offered in both – either periodically or after completion of the tenure.
• Customers can only break the FD and withdraw the amount in case of an emergency. Also, for this premature withdrawal, he has to pay a penalty. 
• He also needs to give notice to the bank for premature withdrawal at least 7 days before the withdrawal date. 
• The amount can be invested for a minimum period of 7 days and a maximum period of 10 years.
• After 10 years, the customer can reinvest the amount for the desired period. 

Type of Fixed Deposits

The various fixed deposit types are explained in detail

Normal Fixed Deposits

• Here, money is deposited for a fixed tenure.
• The tenure can be anything from 7 days to 10 years.
• Customers get a higher interest rate than a normal savings bank account.

Tax-savings Fixed Deposits

• Customers get a tax exemption of up to Rs. 1.5 lakhs every year if he has invested in a tax-saving FD account. 
• It has a lock-in period of 5 years, before which the customer cannot withdraw the amount without getting a penalty.
• It only allows a one-time lump sum deposit.

Senior Citizen Fixed Deposits

• It is available for individuals who are above 60 years of age.
• Senior citizens usually get a higher interest rate over the deposited amount than others.
• They get more flexible tenures.

Cumulative FD

• In this type of FD, the interest is calculated every 3 months or annually and paid after completion of the tenure. 
• It helps customers grow their income substantially.

Non-Cumulative FD

• Interest is calculated and paid on a monthly, half-yearly or annual basis, as per the choice of customers.

Flexi Fixed Deposits

• Flexi FDs are linked to the customer’s bank account.
• Money can be transferred from a savings account to an FD account and vice-versa.

Documents Required for a Fixed Deposit Account

The list of documents are:

Proof of identity

• Voter ID
• Aadhar Card
• PAN Card
• Ration Card
• Driving license
• Senior citizen ID Card

Proof of address

• Bank statement with cheque
• Utility bills
• Identification card 

How to open a fixed deposit account?

Here are both online and offline methods explained briefly to open a fixed deposit account:

Online method

• Go to the official website of the bank where you want to open an FD account.
• Log in to its net banking platform.
• Click on the fixed deposit option.
• Fill out the online application form and upload the required documents.
• Now deposit the amount for FD.
• If you already have an account in the bank where you are opening an FD account, then there is no requirement for KYC. However, if you are opening an FD account in a new bank, you have to go through the process of KYC. 

Offline method

• Visit the bank’s branch in person.
• Fill out the fixed deposit application form and attach the necessary KYC documents.
• Along with the form, deposit the amount for your FD account to the concerned official. 
• Make sure you can have all the KYC documents in their original forms for verifications.

Fixed Deposit schemes for NRIs

NRI customers can also make FD in India. For this purpose, they get two types of accounts:

Non-resident External (NRE) Fixed Deposit

• NRE fixed deposit is beneficial for those customers who are earning in foreign currencies but want to convert their money into Indian currency. 
• With an FD, customers get their amount converted to the value of the Indian currency along with an adequate interest amount. 
• The interest earned over the deposited amount is completely tax-free. 
• Moreover, customers can even repatriate the principal and interest amount completely. 
• The only possible risk in NRE FD is that the deposited money can get affected because of the fluctuations in the global currency rate.

Non-resident Ordinary (NRO) Fixed Deposit

• In the case of NRO FD, the earned amount of interest is taxable as per the income tax category of the customer. This also includes wealth and gift tax. 
• Only the earned interest amount is repatriable in this FD. However, within the set limit of a certain bracket, customers can repatriate the principal amount too. 
• In NRO FD, customers can make deposits in either foreign currency or in Indian Currency.
• This is the best way to manage funds for those people who are living abroad but are also earning income from India.

Fixed deposit is the best way to multiply savings for those people who want to choose the safest form of investment for a definite period. Upon maturity, they will receive the interest rate as per the bank’s policy, as well as the principal amount. Furthermore, it also gives people a good way to get tax benefits of up to Rs. 1.5 lakhs per year irrespective of their tax brackets.