Overview of Bank Fixed Deposit

The account which is opened for a particular fixed period (time) by depositing particular amount of money is known as Bank Fixed Deposit. Fixed Deposit, also called Term Deposit is an investment where the interest rate is guaranteed for a fixed term.

Fixed Deposits (FD’s) are investment instruments offered by banks. They are instruments where you can deposit money for a higher rate of interest than savings accounts. You can deposit a lump sum of money in fixed deposits for a specific period, ranging from 7 days to 10 years.

Once the money is invested with a reliable bank, it starts earning an interest based on the amount, period and from bank to bank. The term ‘fixed deposit’ means that the deposit is fixed and is repayable only after a specific period is over. The money cannot be withdrawn before maturity, but you may withdraw them after paying a penalty.

At the end of the duration of the deposit the amount that is originally deposited is returned to the depositor.

Bank Fixed Deposit Suitablility

• For:-

Investors who are looking to invest a lump sum amount and earn assured returns o this investment. It is suitable for a person whose goals are 5 years away.

• Not for:-

Investors who are looking for wealth creation over a long term should not invest in bank fixed deposit. The reason behind this is inflation. The returns from the FD would not be able to beat inflation over a longer period of duration. Bank fixed deposit is also not suitable for investors who want invest small amounts regularly.

Guaranteed Returns

Fixed deposits enable investors to earn higher interest on their extra funds. Returns on fixed deposits are guaranteed for the duration of the deposit. Also, there is no risk of loss of principal. Some banks also offer greater returns for senior citizens.

Bank fixed deposits are currently offering interest rates around 7%.

Given below are the Interest Rates on Fixed Deposits of Major Banks August 2018.

For knowing the average returns given by bank fixed deposits you can have a look at the chart provided in the next point.

Inflation Effect

Bank fixed deposits are not inflation protected. This means that when inflation is higher than the deposit interest rate, the deposit will not earn any real returns. Bank fixed deposits will only give a real rate of return when inflation is lower that deposit interest rate.

The chart below shows the comparison between inflation and average FD returns over the years.

Liquid Investment

Bank fixed deposits are liquid but the liquidity is low. The bank fixed deposits have a lock-in period. But the deposits allow withdrawals with the payment of penalties for doing so.

Taxation on Bank Fixed Deposit

Bank fixed deposits are taxable. That is no deductions available. Only the deposits having maturity period of 5 years are eligible for deduction under section 80C. The interest earned from fixed deposits in both the cases is taxable. It is taken under the head income from other sources while calculating payable income tax.

From 1^stJune, 2015 tax is deducted at source on the interest income above Rs. 10,000 at a rate of 10%. This limit has been increased to Rs. 50,000 for senior citizens.

Alternative Investment Options

If an investor doesn’t want to invest in bank fixed deposit, it has the following alternatives available, which have same characteristics:-

• National Savings Certificate [NSC]
• Post-Office Time Deposits
• Company Deposits
• Debt Mutual Funds