What is Fixed Deposit (FD) And Explain How Does It Work


Fixed deposits are a form of Term deposit offered by banks in India. They are a popular form of Term deposit, Recurring Deposits (RD) being another. 

In India, FD is offered for a tenure of 7 days to 10 years. For tax-saver FDs, your tenure options get limited between 5 and 10 years. Typically, interest rates increase proportionally with the increase in the tenure of deposit, the range being between 3.50% and 9.20% yearly.

Usually, in India, the interest on Fixed Deposits is paid every three months from the date of the deposit. (e.g., for FD a/c opened on 15th September, you will receive the first instalment of the interest on 15 December). 

The two main types of FD available in India are:

Non-cumulative FD Plan: In this plan, the investor deposits the amount for the chosen period, and the interest thereon usually is credited to his/her bank account on a quarterly mode. 

If you want a regular supplementary income where your principal remains invested for the period selected, and you receive the simple interest periodically, then we suggest you go for the non-cumulative mode.

Cumulative FD Plan: In a cumulative Fixed Deposit (FD), the investor deposits the amount for the chosen tenure. However, the interest thereon is compounded every quarter, added to the principal, and reinvested. At maturity, the final payout to the investor is the combination of the principal & interest accrued.

Premature withdrawal

At times, you may need to withdraw your FD partly/entirely before maturity. Most banks in India allow this facility, known as premature withdrawal. You receive interest based on the applicable rate when you are withdrawing. 

For example, you make an FD for 7 years at 8%, but choose to withdraw after 3 years. If the bank’s rate for FD for 3 years is 5%, you will receive interest @ 5 per cent. You might be charged an amount for early withdrawal. Use an FD deposit calculator to evaluate different scenarios.

Automatic renewal

Most banks in India provide an automatic renewal option of FDs, subject to your instruction. On the maturity date, your deposit gets renewed for a tenure chosen by you. The interest rate offered will be as on the day of renewal.

Advantages of Fixed Deposit

Now, we will take a look at why FDs are a chosen investment vehicle for many of us nowadays, and why you, as an investor, should definitely consider this option:

  1. Assured Returns On Investment
  1. A Wide Range Of Deposit Tenures
  1. Loan against FD

A FD account gives you good returns, helps minimize taxes (if you go for a tax saver FD), and is among the most secure savings options. Go for it.

Leave a Reply

Back To Top