Are you looking to grow your savings but don’t know where to start? Fixed deposits are a great option for those seeking safe and reliable returns. They provide a secure way to save money while still being able to earn interest on the amount deposited. In this article, we will explore different types of fixed deposit available in the market, what they offer and how they can be beneficial for you. Let’s learn about different types of fixed deposit.
Overview of Fixed Deposits
|Definition||A type of savings account where you deposit a fixed amount of money for a specific period of time, and earn interest on the deposit.|
|Providers||Banks and Non-Banking Financial Companies (NBFCs)|
|How to Open||Online or Offline, depending on the provider|
|Risk Level||Low, as fixed deposits are typically guaranteed by the Reserve Bank of India (RBI)|
|Is there any fixed deposit scheme for NRIs?||Non-resident Indians can choose from a variety of fixed deposit options, such as NRE and NRO fixed deposits.|
|Premature Withdrawal||Allowed but subject to the bank’s terms and conditions, with a penalty for early withdrawal.|
|Interest Calculation||Interest is typically calculated using a fixed deposit interest rate calculator, which takes into account the deposit amount, tenure, and interest rate.|
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What Are the Types of Fixed Deposit in India?
A standard fixed deposit (FD) is a type of savings account that allows investors to deposit a fixed amount of money for a specific period, ranging from 7 days to 10 years. In return, they receive a pre-defined and typically higher interest rate compared to a regular savings account. Standard FDs offer the added benefit of being used as collateral for loans and overdraft facilities. While investors can withdraw their money before the FD matures, they may be subject to a penalty for early withdrawal.
Corporate Fixed Deposits
Corporate fixed deposits (FDs) are savings products that are offered by private financial institutions and non-banking financial companies (NBFCs) and are guaranteed to provide investors with a fixed return. These FDs function much like bank FDs in that they allow investors to deposit a lump sum amount and earn interest over a chosen investment period.
Credit agencies like ICRA and CRISIL rate corporate FDs to indicate the risk and potential returns associated with the investment. Generally, corporate FDs offer higher interest rates than bank FDs, making them an attractive investment option for investors seeking higher returns.
Tax-Saving Fixed Deposits
Tax-saving fixed deposits are a type of investment product that offers investors the opportunity to save on taxes. These deposits are available at most banks across India and require a one-time lump sum deposit. Unlike standard fixed deposits, tax-saving FDs have a lock-in period of 5 years during which investors cannot withdraw their funds. It’s worth noting that tax-saving FDs offer tax deductions of up to Rs. 1.5 lakh annually, making them a popular choice for those looking to reduce their tax liability.
Special Fixed Deposits
Similar to standard fixed deposits, these funds also have a specific investment period. However, the key difference is that if you keep your funds invested for the entire duration, you may earn a higher interest rate than a standard fixed deposit.
Cumulative Fixed Deposit
A cumulative fixed deposit is an investment option where the interest earned on the deposit is not paid out at regular intervals, but only upon maturity. These deposits generally offer higher interest rates than regular savings accounts and are ideal for those who don’t require regular interest payments. The tenor of a fixed deposit can range from one to five years, depending on the investor’s preference. Cumulative fixed deposits are a low-risk investment option, and the longer the investment period, the higher the interest rate offered.
Non-cumulative fixed deposits are an investment option where the interest earned on the deposit is paid out at regular intervals, rather than at the time of maturity. These fixed deposits are typically suitable for investors who require a regular source of income in the form of interest payments.
The tenure of these fixed deposits ranges from one to five years, with shorter tenors generally offering lower interest rates than longer tenors. One thing to keep in mind with non-cumulative fixed deposits is that since interest is paid out at regular intervals, the overall interest earned at maturity may be lower than with a cumulative fixed deposit, where the interest is paid out only at maturity.
Senior Citizen Fixed Deposits
Senior citizen fixed deposits are a type of investment option offered by banks and NBFCs, exclusively to individuals aged 60 years and above. These fixed deposits offer a higher interest rate than the base rate applicable for regular citizens. Typically, senior citizen fixed deposit rates are around 0.25% to 0.50% higher than the interest rates offered to regular citizens.
These fixed deposits are ideal for senior citizens looking for a stable and secure investment option with a guaranteed return. The tenor of senior citizen fixed deposits can range from one to ten years, depending on the investor’s preference.
Flexi Fixed Deposits
Flexi fixed deposits are a type of investment option that offers flexibility and convenience to customers. It is a combination of a fixed deposit and a savings/recurring account. Investors in flexi fixed deposits enjoy the benefit of higher interest rates offered by fixed deposits along with the liquidity provided by savings accounts.
This type of fixed deposit also offers the facility of partial withdrawals up to a specific amount from the savings/current account, which is usually merged with the fixed deposit in flexi FDs. This feature provides investors with greater flexibility in managing their funds and enables them to access their money when needed. The tenure of flexi fixed deposits can range from a few months to a few years, depending on the investor’s preference.
Regular Income Fixed Deposits
This type of FD is ideal for those with limited income who rely on interest earned from bank deposits to meet their monthly expenses. With this type of FD, you have the option to receive interest payouts on a monthly or quarterly basis, providing a regular and predictable source of income.
NRI Fixed Deposits
NRI Fixed Deposit is a special type of fixed deposit that is available for Non-Resident Indians (NRIs) as well as Indian citizens. There are several options available for NRI Fixed Deposits, including NRE Fixed Deposits, NRO Fixed Deposits, FCNR Fixed Deposits, and RFC Deposits. These options vary in terms of currency, repatriability, tax, and tenure. NRIs can choose the type of NRI Fixed Deposit that suits their needs.
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How to Choose the Right Types of Fixed Deposit?
To make the most of your investment, it’s important to compare the interest rates offered by different types of fixed deposit. Depending on the type of FD, the interest rates can vary significantly. For example, a corporate FD may offer higher interest rates than a bank FD. It’s important to do your research and compare the options available to you to ensure that you’re earning the maximum returns on your investment.
Premature Withdrawal Clause
Before investing in a fixed deposit account, it is essential to verify the terms and conditions of premature withdrawal. Most banks and non-banking financial companies (NBFCs) impose a penalty of 0.5%-1% on the interest rate for early withdrawals. Comparing premature withdrawal policies of different lenders can help you choose the one with the lowest penalty.
It’s important to note that certain fixed deposit accounts, such as tax-saving FDs, do not allow premature withdrawals during the lock-in period of 5 years. Therefore, it is crucial to evaluate this factor before investing to avoid any inconvenience later on.
Fixed deposit accounts not only serve as tools for building fiscal security for the future, but they can also provide a source of emergency funds when needed. By selecting an FD account with a loan facility, you can ensure that you have enough cash reserves to tackle a financial emergency.
However, it is important to note that not all types of fixed deposit accounts come with this facility, and the total amount that can be borrowed against the FD also varies from lender to lender. It is essential to understand the terms and conditions of the loan facility before investing in a particular FD.
Credibility of the Lender
When choosing a fixed deposit account, it’s essential to consider the credibility of the lender. You can evaluate the lender’s creditworthiness based on established credit bureaus like CRISIL and ICRA. The credit rating of the lender reflects the safety of the savings plan and the lender’s payment history consistency. Therefore, it is crucial to take into account the credit rating of the lender to ensure that your investment is safe and reliable.
When selecting a fixed deposit plan, it is important to consider the various payout options available. Depending on the type of fd plan you choose, you may be entitled to either a lump sum payout at maturity or regular payouts at fixed intervals.
For instance, a cumulative FD plan allows you to receive the interest earned plus the principal amount invested in a lump sum at the end of the tenure. On the other hand, a non-cumulative FD plan offers regular payouts, which can be on a monthly, quarterly, half-yearly, or annual basis.
It is important to choose the right payout option based on your financial goals and needs. If you have a steady source of income from other sources and want to maximize your earnings, a cumulative FD plan may be a better choice. However, if you are a retired individual and require a regular income stream, a non-cumulative FD plan with regular payouts may be more suitable for you.
Tax Exemptions and Tenors
When investing in fixed deposits, it’s important to keep in mind the tax implications of the interest earned. The interest earned on FDs is taxable under Section 80C of the Income Tax Act, 1961. However, tax-saving FDs offer an annual tax exemption of up to ₹1.5 Lakhs. But it’s important to note that such plans come with a mandatory 5-year lock-in period.
Therefore, it’s essential to assess your financial goals and determine if you can afford to lock in your funds for 5 years. Alternatively, you can opt for a flexible tenor FD if you require liquidity benefits. Understanding the different types of fixed deposit and their features can help you make an informed decision when booking an FD.
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