Different Types of Fixed Deposits and How they Work

For a majority of Indians, for a very long time, fixed deposits, FDs have been the go-to investment product, and why shouldn’t they? They are one of the safest investments that can be done in the easiest and quickest way possible. Governed by the RBI, almost all types of fixed deposits are considered to be no-risk, and if you are an investor who is averse to taking any financial risks, this might be the best option for you.

All major banks and financial institutions in the country offer fixed deposits that can range from 7 days to 20 years. However, there are different types of fixed deposits, and when planning to invest in one, it is recommended that you understand what they are and how they work.

Types of Fixed Deposits

In fixed deposits, you fix a sum of the amount for a fixed tenure and earn interest. Starting from as low as 7 days, you can fix them for 20 years. Different types of fixed deposits are-

• Cumulative
  In the cumulative fixed deposit, you receive the amount along with the principal amount only at the time of maturity of the deposit.
• Non-cumulative
  In the non-cumulative fixed deposit, you can claim interest on a monthly, quarterly, half-yearly, or yearly basis. Quarterly is the most common and the monthly interest option is offered at a discounted rate.

Both of these FDs have the same interest rates. Some of the other common types of fixed deposits offered by Indian banks are –

• Standard Fixed Deposit
• Tax Saving Fixed Deposit
• Special Fixed Deposit
• Regular Income Fixed Deposit
• Senior citizen Fixed Deposit

1. Standard Fixed Deposit

Every Indian Bank offers this FD and you can fix the money from 7 days to 10 years. It offers higher interest rates as compared to savings accounts.

2. Tax Saving Fixed Deposit

This FD helps you save tax, as the name suggests and you can save up to 1.5 lakh INR. With a one-time deposit, you can fix it for 5 years but cannot withdraw before maturity.

3. Special Fixed Deposit

This is the same as Standard FD but the difference lies in the withdrawal of money. If you keep it till maturity, you get higher interest rates than Standard FDs.

4. Regular Income Fixed Deposit

This FD allows you to have monthly interest income to compensate for your financial needs.

5. Senior citizen Fixed Deposit

It offers special interest rate facilities to citizens who have crossed the age of 60.

These are the different fixed deposits types in India for you to choose from.

Benefits of fixed deposits

• Easy Investment Option
• Reliable Returns
• Compounding
• Income Flow
• Save your tax
• Flexibility in FD

Fixed Deposits hold the trust of many Indians. Let us take a look at the various benefits it offers:

Easy Investment Option

Fixed Deposits are considered to be the most hassle-free investment option. If you have a savings account in a bank, all you need to do is follow some easy procedures both online and offline. You can also choose to automatically renew or transfer the maturity amount to your bank account.

Reliable Returns

The market is subject to ups and downs which is why share markets can be risky. But this is not the case with Fixed Deposits. It is not subject to change with the change of interest rate in the market. The interest rate with which you start your FD remains unchanged till maturity. This is why it offers your regular and fixed returns without any worries.

Compounding

When you choose a reinvestment option with an FD, it offers you compound interest where you get interests on both the principal amount and the interests earned.

Income Flow

One of the best parts of FD is it offers you a regular income. You have different interest payout options like monthly, quarterly, half-yearly, and yearly. You can also opt to withdraw interest along with the principal amount upon maturity.

Save your tax

If you choose a five-year tax saving FD, you can get a tax exemption under Section 80C of Income Tax of India.

Flexibility in FD

Do you also have a misconception that FDs are not flexible? Let’s break your illusion:

• You can choose tenure from 7 days to 10 years
• In case you need FD money, you can have 90% of the money as overdraft and you will have to pay interest only on the amount used.

Before you invest in an FD:

The benefits of fixed deposits are many, however, there are a few things that you must know before you invest in one. Make sure that inadequate knowledge does not dampen your investment plan.

1. The interest rates may differ across lenders, depending on the fixed deposits type and tenure
2.  There is a penalty that you would have to bear in case of a premature withdrawal
3. The interest that you earn on your FD is taxable according to the tax slab you fall in

Conclusion

The list of advantages of fixed deposits is a long one. By depositing a certain amount for a pre-decided tenure, you earn interest. Knowing about them in detail would allow you to invest correctly.