How Does Fixed Deposit Work in India?

Investing your money is a smart way to grow your wealth, but it's not just about the long term. Your investments can help you meet short-term goals or build up an emergency fund to cover unexpected expenses.

One popular option for saving is a fixed deposit account with a specific lock-in period. Depending on the bank, these accounts can have terms ranging from as little as 7-9 days to up to 10 years. Even after maturity, you can continue to deposit funds for a set amount of time. However, withdrawing funds early can result in a penalty. In this blog post, we'll take a closer look at how does fixed deposit work and the key steps to take before investing in one. Let's see how fixed deposit works actually.

How Does Fixed Deposit Work?

A fixed deposit is a special kind of investment scheme that banks and other financial institutions offer. When someone opens a fixed deposit account, they agree to deposit a specific amount of money for a certain length of time. In exchange, they earn a higher interest rate than they would with a regular savings account. When the term ends, the customer gets back their original deposit plus the interest that has accumulated.

Typically, fixed deposits have rules about how much money needs to be deposited and how long it needs to be kept in the account. The interest rate is usually higher for longer-term deposits. Although it's sometimes possible to withdraw money from a fixed deposit before the term is up, doing so can result in a penalty. Fixed deposits are a good option for people who want to save money and earn more interest than they would with a standard savings account. When the fixed deposit reaches the end of its term, the bank will transfer the full amount, including the interest that has accumulated, to the customer's bank account.

How is FD Interest Calculated?

There are two ways to calculate the total earnings and interest you can earn on a Fixed Deposit. Both formulas can give you a good idea of the earnings you can expect from your fixed deposit, so choose the one that works best for you.

• Simple interest:

  P*R*T (here, ‘P’ is the principal amount, ‘R’ is the interest rate, and ‘T’ is the tenor of the deposit)

• Compound Interest:

  P+[(1+r/n)∧ t]-P (here, ‘P’ is the principal amount, 'r' is the interest rate, 'n' is the number of years, and 't' is the compounding frequency)

What Are the Types of Fixed Deposits?

In India, there are several types of fixed deposits available to investors. Some of the most common FD types include:

1. Regular Fixed Deposit

2. Tax Saving Fixed Deposit

3. Senior Citizen Fixed Deposit

4. NRI or NRO Fixed Deposit

What Are the Benefits of Fixed Deposit?

Fixed deposits are a popular investment option that offers several benefits. Some of the key advantages of FD are:

1. Stable Returns: Unlike other investments, fixed deposits offer stable returns as the interest rate remains constant throughout the tenor, regardless of market fluctuations.

2. Easy to Open: Opening an FD account is simple and can be done online with just a few clicks. Once the investment is made, there's no need to monitor it until maturity.

3. Regular Income: You can choose to receive periodic payouts from your FD, providing a steady source of income.

4. Flexible: FDs offer flexibility in terms of tenor, investment amount, and payout options.

5. Tax Benefits: Investing in a tax-saver FD can provide tax benefits under Section 80C of the Income Tax Act, allowing you to save up to ₹1.5 Lakhs.

6. Loan Against FD: In case of a financial emergency, you can take a loan against your FD without having to withdraw the investment prematurely.

7. Low Minimum Investment: You don't need a large sum to start investing in FDs, with some banks and NBFCs offering a minimum investment amount as low as ₹1,000.

8. Investment Planning: Using a fixed deposit calculator can help you plan your investment and compare earnings for different tenors and issuers.

9. NRI Investment: Non-Resident Indians (NRIs) can also invest in FDs with NRE and NRO fixed deposits, providing a safe investment option.

10. Senior Citizen Benefits: Senior citizens can benefit from higher interest rates offered by some banks and NBFCs, making FDs an attractive investment option.

11. High-Interest Rates: Interest rates on FDs are typically higher than those offered on savings accounts.

12. Easy Liquidation: Liquidating an FD is a simple and easy process that can also be done online.

Final Thoughts

So, that's a wrap on our discussion of fixed deposits in India! We hope that this article has helped you understand the ins and outs of this popular investment option and why it matters. While FDs may not be the flashiest investment out there, they do offer a reliable way to earn steady returns and grow your money over time. Whether you're a first-time investor or a seasoned pro, fixed deposits are definitely worth considering as part of your overall investment strategy. So, what are you waiting for? Start exploring your options and see how you can put fixed deposits to work for you!