A large portion of the country’s population has a Fixed Deposit (FD) to their name. Thus, it is essential for everyone’s financial health. But are we all aware of how a fixed deposit account works? This article details the different facets of fixed deposit accounts and how to navigate it.

What is Fixed Deposit account?

A fixed deposit account is a type of loan given to the bank where the bank pays you a return for exchange. Each fixed deposit account has a fixed tenure, which can range from one day to 20 years. Upon putting your money in an FD you lock in the amount for a fixed duration with the bank. Then the bank pays you interest on the principal sum of amount. The interest is added to the principal amount after every specific interval of time. Since there are flexible tenures for FD you can have multiple FD accounts of different tenures, at the same time. Thus, you can earn more on through investing in multiple FDs.

Types of Fixed Deposit accounts

There are various types of FDs one can open. These are as follows:

• Regular Fixed Deposit – The most common type of FD, this is for anyone below the age of 60 years. You deposit money for a fixed tenure which can lie between seven days to ten years. Hence, you get regular interest on the FD which is usually higher than savings account returns.
• Flexi Fixed Deposit – This type of FD is linked to your savings account. Whenever savings account reaches a threshold, the extra amount is transferred to the FD. Alternatively, when the savings account fund decreases, FD amount is transferred back. This gives a better interest rate on the principal amount. Flexi FD is available at most National and Private banks.
• Tax Saving Fixed Deposit – This gives you tax exemption of up to Rs 1.5 lakh on the principal amount, in a calendar year. This is as per Section 80C of the Income Tax Act. But there is a lock-in period of 5 years, during which you cannot withdraw any amount from the FD. There is also facility of only one time lump-sum deposit.
• Senior Citizens’ Fixed Deposit – This is available for citizens above 60 years of age. The tenures are flexible and the interest rate is approximately 0.25% – 1% higher than regular FD account.
• Shareholders’ Fixed Deposit – This is not available at banks. This can be accessed through corporates, NBFC, HFC. Although this is only accessible by individuals who hold shares of that particular establishment. Here also you get 0.25% – 1% extra interest rate on the FD than regular FD.

Auto-renewal of FD

You can set your Fixed Deposit account on auto-renewal, thus not wasting even a single day on filing paperwork for the same. Thus, whenever your FD tenure ends, it will automatically renew itself for the same period as the original deposit. This is a good option for someone who does not intend to withdraw their FD balance soon.

However, under the auto-renewal option, the time deposit receipt is with the bank’s custody and Memorandum of Deposit (MOD) is issued in lieu of fixed deposit receipt to the account holder.

Calculation of Fixed Deposit

Basically, for opening an FD you pay a principal amount. Then you receive an interest on the principal amount after every specific interval. But there are two ways for calculating the interest you receive after every interval. This differs as follows:

Non-Cumulative Fixed Deposit

Under non-cumulative FD, the interest rate is calculated via simple interest method. Therefore, the interest gets calculated on the same initial principal deposit every interval. For example, if the principal amount was Rs 100 and the interest rate was 10%, then the interest earned will be Rs 10 after every interval. Thus, after 5 years, your total earning will be Rs 150.

Also, the interest is paid out either monthly or quarterly or half-yearly or annually, as per your choice. You can withdraw the interest after every interval. Thus, overall this is a better option for pensioners looking for a regular source of income without too much risk.

Cumulative Fixed Deposit

On the other hand, cumulative FD calculates the interest via compound interest method. Therefore, the principal+interest of one year becomes the principal of the consecutive year. For example, the principal amount was Rs 100 and interest rate was 10%, then amount earned after first year will be Rs 110. This amount will become principal for second year, and interest earned on it at 10% will be Rs 11. Thus, amount for second year will be Rs (110+11=) 121. Now, Rs 121 will be principal for third year. Similarly, total earning after 5 years will be Rs 161.

You can use this FD calculator to figure out the earnings for your FD. Moreover, in cumulative FD the interest is compounded every quarter or year and paid at the time of maturity. So you cannot withdraw the interest after every year. This method also helps to substantially grow your savings.

Frequency of cumulation

Generally, banks calculate quarterly interest on FDs, which is calculating interest fur times in a year. Then they take the sum of all interest and principal as the principal for the consecutive year. But frequency of cumulation can also vary as half-yearly which is twice a year, monthly which is twelve times a year or yearly which is once a year.

In the image above, the principal amount, interest rate and tenure are all the same. But the compounding frequency changes between once a year, twice a year, four times a year and twelve times a year. Thus, as the compounding frequency increases the final maturity amount also increases. Hence, the higher the compounding frequency for Fixed Deposit accounts, the more interest you will earn.

Rule of 72

A simple method to calculate the time it will take your FD to double in amount is to follow the Rule of 72. This rules entails to 72 by the interest rate. Thus, as seen in the image below dividing 72 by 4 will take you 18 years to double your investment in FD. Similarly, dividing 72 by 16 will take you approximately 4.5 years to double your FD amount.

Where to invest in FD?

You can pick any of the following organizations to open your FD account:

• National banks such as SBI, BOB.
• Private banks such as ICICI, HDFC, Kotak Mahindra.
• Small finance banks such as AU, JANA.
• NBFC or HFC which are finance companies with provision of opening FDs. Their interest rates are also slightly higher. Example, DHFL, Bajaj Finance.
• Credit cooperative societies which usually have the highest FD interest rate. Example, Adarsh credit cooperative society, Sanjivani credit cooperative society.

You can view the interest rate for all banks here and interest rates for all corporate here. The following is a comparative analysis between bank FDs (National and private) and corporate FDs (NBFC, HFC, Credit cooperative societies) to understand which one may be a better option for you:

Therefore, overall we see that bank FDs are better for passive investors and for long-term investment. Meanwhile, corporate FDs are better for active investors and short-term investment.

How to decide where to invest?

Rs 1 lakh insurance cover on deposit of up to Rs 1 lakh in any bank is protected under the Deposit Insurance & Credit Guarantee Scheme of India. So this can provide you some relief while investing.

Effect of interest rate

Among the different banks and corporates, interest rates range between 4%-12%. Sometimes, the difference between two FDs may seem insignificant, but even a half per cent variation can lead to big difference in results. To understand how different interest rates affect FDs, view the image below.

Here, you can see that the interest rate varies from 5.5% to 8.5% among seven FDs. Even though all have the same principal amount and quarterly compounding frequency, after one year the total interest earned on the FDs range from Rs 5614 to Rs 8775. This difference in percentage varies from 0% to 56%, which is huge. Similarly, if we change the tenure from one year to five years, the difference in interest earned becomes even larger. Therefore, over the long-term, even a half per cent difference in interest rate will result in major profit or loss in net amount earned. You can calculate your interest rate variations in this calculator.

Is Fixed Deposit taxable?

Yes, the interest earned on a fixed deposit account is fully taxable under Section 80C of the IT Act. TDS is also applicable on the earning of interest on FD but can be avoided by submitting Form 15G or 15H in case of senior citizens. Alternatively, senior citizens can claim a deduction of up to Rs 50,000 on interest earned from FD under Section 80TTB of the IT Act.

Fixed Deposit withdrawal

It is possible to withdraw money from your FD in case of an emergency. But this incurs a penalty of a minimum 1% on interest and other lump-sum penalties. Therefore, a better option is to take a loan against your FD instead of withdrawing funds from it.

Loan against Fixed Deposit

It is also possible to take a loan against your FD in banks. The process is quite simple too. Generally, you can get a loan at an interest rate which is 1%-2% higher than your FD interest rate. You have to pay back the loan within the tenure of the fixed deposit though. Although the loan amount is 75%-90% of the FD amount and the FD is taken as collateral by the bank.

Watch the video on more details of Fixed Deposit account.

Income Tax Vs TDS

Income tax is the tax applicable on your annual income depending on your earnings bracket. Read more about it in Income Tax Calculation, Slab Rates & Important Details For Beginners.

TDS on the other hand is Tax Deducted at Source, which is tax deducted from your payment before the actual payment. Now after your actual ITR filing, you get to know your actual tax liability for the year. So if your TDS deducted is more than your tax liability, you can get a TDS refund. But if the TDS deducted is less than your tax liability, then you have to pay the surplus amount.

Learn more about TDS in How To Calculate TDS And Reduce TDS On Salary and TDS Refund Filing Online Procedure. Learn about ITR filing in Income Tax Return Filing For Salaried Persons | Online Process.

How much TDS is applicable on Fixed Deposit account?

If the interest earned on FD account is more than Rs 10,000 then TDS will be deducted on it. Since banks can deduct TDS on up to Rs 10,000. Meanwhile, corporates such as NNFCs and HFCs can deduct TDS on up to Rs 5000. Thus, if interest earned in corporate FD account reaches over Rs 5000 then TDS will be deducted on it.

If your PAN details submission is complete, then 10% TDS deduction will occur in both situations. But if your PAN details submission is not complete then an astounding 20% TDS deduction will occur in both cases. Therefore, it is extremely important to submit your PAN details with your FD account location.

How to avoid TDS deduction on FD account (non-taxable income)?

If you fall under the non-taxable income bracket then you must fill Form 15G and Form 15H. This will help you in savings TDS on FD account. It is always preferable to stop TDS deduction before it occurs when you are not liable for any tax paying. Since getting TDS refund is a tedious process and will take some time. If your age is below 60 years then you must fill and submit Form 15G. But if you are above 60 years then you must fill and submit Form 15H at your bank or corporate. Once you submit them, bank/corporate will not deduct your TDS.

How to avoid TDS deduction on FD account (taxable income)?

If you fall under the taxable income bracket then you cannot submit Forms 15G and 15H. In this case you need to make multiple small Fixed Deposit accounts such that the interest earned on any account does not cross Rs 10,000 for banks and Rs 5000 for corporates.

Moreover, if you have multiple FDs in the same bank and interest on all amount to over Rs 10,000, then also you will get TDS deduction. So it is advisable to open multiple FDs across different banks. Although all interest earnings will get added to your income and you will have to pay tax on it.

Formalities after TDS deduction

If the bank deducts TDS on your FD then it will provide you with Form 16A. This document will detail the date and amount of TDS deduction by the bank. This TDS amount will reflect in your annual ITR filing under Form 26AS. If there is a mismatch between these two documents then you must contact your bank or IT Department.

Tax on fixed deposit

The tax on your fixed deposit is calculated as income from other sources. The amount is added to your tax bracket and as per the slab, tax rate is deducted. If TDS on FD is already deducted then you can claim a refund. The tax on FD account is calculated yearly on an accrual basis. So tax is applicable on whatever interest is earned in one year instead of waiting for the end of the FD tenure.

Watch below video for more details on tax and TDS on fixed deposit account.

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