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Fixed Deposit(FD) is an investment product which allows you to invest a lump of money for a fixed time period and at a fixed rate of interest. It is quite popular form of investing in India. This article is overview of fixed deposit as to what it is, interest rate, how safe it is, it’s liquidity – loan/premature withdrawal, tax, TDS, Nomination.

What is Fixed Deposit?

Fixed Deposits are bank deposits for a fixed or specified period chosen by investor or depositor at a fixed rate of interest. You can deposit money for as short a period as 7 days and upto 10 years. As interest rate and time period are fixed this investment product is called as Fixed Deposit. It is known as a Term Deposit in the Canada, Australia, New Zealand, Certificates of Deposit in the United States and Bond in United Kingdom. Ref:Fixed.Deposits.org

Interest

When you open a fixed deposit with bank then you are lending money to the bank and it pays you interest. Each bank or financial institution that is offering fixed deposits fixes its own deposit rates. Interest rates are subject to change from time to time. The interest of FD varies based on the time period, the amount which is deposited. Most of the banks offer a higher interest rate to Senior Citizens. Example of the interest rates on Domestic Term Deposits by State Bank of India is given below.

Fixed Deposits Interest rate from State Bank of India

Fixed Deposits Interest rate from State Bank of India

Interest rates of ICICI Bank, Interest rates of HDFC Bank

Applicable interest rates will be given as on the date of receipt of the funds by the bank and is fixed for the specified duration. During the course of the FD, even if the prevailing interest rates go up or down, you will be entitled to the rate of interest that was promised to you when you first made the deposit. Interest can be paid in two ways:

  • Interest can be paid on a monthly basis or on a quarterly basis called the Traditional scheme  or
  • Reinvestment scheme or Cumulative Fixed Deposits where the interest is compounded to the principal amount on a quarterly basis and the interest is reinvested into the fixed deposit. So, after every quarter the principal increases by an amount earned as the interest in the last quarter. The invested amount along with interest is available only at maturity.

Maturity Value means the amount payable to the customer at the end of the term of the fixed deposit subject to deduction of any tax as may be applicable.

To know about interest rates, compounding frequency, calculation of interest rates, how interest rates have changed over years, compare the Fixed Deposits you can read our article Fixed Deposit and Interest Rate To calculate Maturity value you can use Fixed Deposit Calculator.

Safety

Deposit of up to Rs 5  lakh in any bank is protected under the Deposit Insurance & Credit Guarantee Scheme of India(DICGC). For details on DICGC  you can refer to .

How to Open Fixed Deposit

At a bank branch where you have a saving account you can open a fixed deposit through Internet Banking, Phone banking or walk into the branch with a cheque. For details on opening through internet you can see FAQ on Fixed Deposit opened through internet in State Bank of India .

You can also open a fixed deposit account at any bank without having to open a saving bank account, though at times some banks insist that you open the saving bank account also. The documentation required at a new bank would be the same as opening a new account where identity and address proofs are required.

FD Receipt

You get FD receipt unless you open through Internet Banking. If Fixed Deposit Receipt is not given it can be made available to the customer on request. A sample FD receipt from freeganita.com is given below

Fixed Deposit receipt

Fixed Deposit receipt with explanation

Redemption of FD

After the maturity of your FD, you can walk into any branch of the Bank across the country and claim your deposit by furnishing your Fixed Deposit receipt/Memorandum of Deposit. If you have an account with the bank and you have not opted for auto-renewal then the money gets credited into your saving bank account.

Auto-Renewal of FD

Auto-renewal allows your FD to get renewed automatically for the same period as the original deposit. However, under auto-renewal option the fixed deposit receipt is with the custody of the Bank and Memorandum of Deposit (MOD) is issued in lieu of fixed deposit receipt. You can opt for auto-renewal at the time of opening the FD or anytime before the FD matures. In case of renewed deposits, the new deposit amount consists of the: original amount + interest -Tax Deduced at Source (if any)

But be careful with the auto-renewal and check the interest rate.

Premature Closure of Fixed Deposit

Fixed Deposit can be closed before the original term of the FD may be because you need money or you want to reinvest at higher rates. In the event of the Fixed Deposit being closed before completing the original term of the deposit, interest will be paid at the rate applicable on the date of deposit, for the period for which the deposit has remained with the Bank. In case of premature withdrawal, the deposit may be subject to the penal rate of interest as prescribed by the Bank on the date of deposit. RBI has left it to banks to decide whether they want to impose any penalty on premature closure of fixed deposits. Premature Closure Terms by ICICI bank are given below:

Terms and Conditions for Premature closure of Fixed Deposit in ICICI banks

Terms and Conditions for Premature closure of Fixed Deposit in ICICI banks

Loan against FD

When you invest in a bank fixed deposit, you can easily get a loan against it without having to break it. This is similar to a personal loan. However, the loan is structured as an overdraft facility against your fixed deposits.

  • There is no specific tenure; you can avail of the loan till the deposit matures. If unpaid till maturity, the loan is adjusted against the fixed deposit proceeds.
  • Banks offer a loan anywhere between 75 and 90 per cent of the deposit after maintaining a 10-25 per cent margin. The latter may vary with each bank and every customer.
  • Interest will be charged on the amount drawn and not the limit set. It is around 2-2.5 per cent over the fixed deposit rate
  • When can you borrow after opening the fixed deposit. It varies from bank to bank. Certain banks, such as Punjab National Bank, allow loans from the very next day of making the deposit. Some like HDFC may even offer one after six months. You need to check with your bank on the same.
  • There are no prepayment penalties to foreclose the loan.
  • There is no restriction on the end use of funds. It can be used to meet financial requirements, business, direct investment in India or for buying property.
  • Salaried individuals cannot get tax benefits on the interest paid on loans against fixed deposits.Self-employed individuals using the funds for the purpose of business can deduct the interest paid as a business expense from their business income and pay tax on the remaining amount only.

Our article covers in detail loans against Fixed Deposit (C0ming Soon)

Tax on Fixed Deposit

Interest received from fixed deposits is taxable in the hands of the receiver. Also Tax is deducted by the bank, after a threshold. If the aggregate interest income from fixed deposits that you are likely to earn for all your deposits held in a branch is greater than Rs 10,000 in a financial year, you become liable for TDS.A consolidated TDS Certificate in Form 16A, for TDS deducted during a financial year will be issued in the month of April of the following financial year. TDS is reflected in the Form 26AS.

Tax liability for TDS purpose is determined at branch level. Deposits held by minors are also subject to TDS. The credit for the TDS can be claimed by the person in whose hands the minor’s income is included. TDS on fixed deposits for different category of account holders,amount is given below

Type of Account Holders Amount Tax rate
Resident Individuals, Hindu Undivided Family (HUF) Upto 10 lakh 10%
Resident Individuals, Hindu Undivided Family (HUF) Equal to & above 10 lakh 10%
Corporate body Upto 1 crore 20%
Corporate body Equal to and above 1 crore 20%

Please note Income from Fixed Deposits falls under the category of Income from Other Sources and is taxed as per the income tax slab of the depositor.  However, the depositors can claim the credit for such TDS in their income tax returns. Our article Overview of Income Tax  gives details about how to Calculate Income tax.

If you believe that your total interest income for the year will not fall within overall taxable limits, you should inform the Bank not to deduct TDS on deposits. You can do this by submitting the specified form under the section 197A of Income Tax Act 1961. The form need to be submitted while opening the Fixed Deposit and subsequently at the beginning of the following financial year. The forms required for different categories have been listed below with links to the form from law.incometaxindia.gov.in are given below

Category Section/Subsection of Income tax Act 1961  Form
Individual above the age of 65 years(60 years from 1st July 2012) Sub-section (1C) of section 197A 15H (pdf)
Individual below the age of 65 years(60 years from 1st July 2012), Hindu Undivided Family Sub-sections (1) and (1A) of section 197A 15G(pdf)
Trusts, Companies 15AA(doc)

Nomination in Fixed Depsoit

The facility of Nomination is available for relationships in the names of individuals. Nomination is the process of appointing a person to take care of your assets in the event of your death. Nomination does give right on the money in Fixed Deposits.  It helps to claim the money in Fixed Deposit. 

  • There can be only one Nominee for a deposit account whether held singly or jointly.
  • A person legally empowered to operate a minor’s account can file a nomination on behalf of the minor.
  • The nomination will remain active and alive as long as the deposit account is renewed. The nomination automatically gets renewed on renewal of the deposit from time to time.
  • Applicants can make nomination by filling up the Form prescribed under the Banking Companies (Nomination) Rules 1985.
  • The nomination details can be changed anytime during the tenure of fixed deposit by filing appropriate Form. You need not even tell the earlier nominee of the change.
  • The legal heirs can lodge their claim for the money of the deceased against the nominee and not against the bank, once the bank has paid the money to the nominee.

We sincerely request you to do nomination if you haven’t done so. Our article Bemoneyaware:Right Paper Work For Those You Love: Part 1(Jan 2012) discusses the nomination,it’s importance in detail.

What happens to FD on Death of Depositor

Banks normally let the term deposit of the deceased accountholder mature. But if you are nominee of the term deposit, you can ask for a premature withdrawal by furnishing the death certificate and your identify proof.

In the absence of any nomination on the term deposit, you have to also make a joint request with all the legal heirs and submit documents to prove your legal authority (Succession certificate, Probate order or Letter of Administration). For more details on Term Deposits please read Page 6,Page 17 of  IBA MOP or our article:Bank Account,Term Deposit,Locker:Paperwork Required For Claim(Jan 2012)

Summary

Let’s look at Fixed Deposit in terms of Liquidity, Safety, Risks, Returns, Tax

Risk and Safety: Bank Deposits come with low risk and offer security of capital or amount invested. Deposit of upto Rs 1 lakh in any bank is protected under the Deposit Insurance & Credit Guarantee Scheme of India(DICGC). 

Tenure: There is flexibility of tenure – 7 days to 10 years

Fixed returns: Interest rate on bank deposit is fixed for the entire tenure of the deposit. But interest rate  vary from bank to bank , vary based on tenure of deposit. Interest rate offered vary over time.

Liquidity:

  • Premature / Partial withdrawal permitted (subject to applicable charges)
  • Loan / Overdraft upto 90% of FD amount
  • Option of monthly / quarterly payout available

Tax: Interest received from fixed deposits is taxable in the hands of the receiver. If the aggregate interest income from fixed deposits that you are likely to earn for all your deposits held in a branch is greater than Rs 10,000 in a financial year, you become liable for TDS.

Fixed Deposit are one of the simplest investment product. It is quite popular, especially among our parents. With the volatility of stock markets, people prefer to invest in Fixed Deposits. What feature of Fixed Deposits you like or dislike?

 

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