Fixed Deposit (FD) accounts are a popular savings tool in India. They enable individuals to park their money with banks, housing finance companies, or NBFCs for a set tenor, earning interest at a predetermined rate. FDs are low-risk investments, making them suitable for risk-averse investors. Though FDs have been traditionally seen as rigid, they offer several features that provide flexibility to savers. Let’s understand how FDs work, and the flexible options available to you.

Benefits of Fixed Deposit Accounts

Here are some advantages of opting for a fixed deposit:

Guaranteed Returns

One of the primary benefits of an FD is that it provides guaranteed returns. Unlike other investment options like stocks or mutual funds, FDs are not subject to market risks. You know exactly how much interest you will earn by the end of the tenor.

Safety of Principal

Your principal amount is safe in an FD. This is because FDs are low-risk investments, making them an attractive option for conservative investors. Additionally, deposits in FDs issued by banks are insured up to ₹5 lakh by the Deposit Insurance and Credit Guarantee Corporation (DICGC), further reducing risk.

Flexible Tenors

FDs offer flexible tenors ranging from 7 days to 10 years. This means you can choose a tenor that suits your financial goals. For instance, if you need money for a specific purpose in one year, you can opt for a 12-month FD. If you are saving for long-term goals, a 5-year or 10-year FD might be more appropriate.

Fixed Interest Rates

FDs offer fixed interest rates, which means the rate agreed upon at the time of deposit will remain the same throughout the tenor. This can be particularly advantageous in a falling interest rate environment. For example, if you lock in an FD at an interest rate of 7.5% p.a. and rates drop to 6% p.a. during your FD tenor, you will still earn 7.5% p.a. on your deposit.

Flexibility in Fixed Deposit Accounts

When an individual open fixed deposit, they can enjoy the following flexibility:

Premature Withdrawal

One of the most flexible features of an FD is the option for premature withdrawal. If you need access to your funds before the FD matures, you can withdraw the amount. However, this usually comes with a penalty. The penalty could be in the form of a reduced interest rate or a fee. It’s essential to read the terms of your FD before opting for premature withdrawal.

Loan Against FD

Instead of breaking your FD, you can take a loan against it. Most banks and NBFCs offer loans up to 90% of the FD value. The interest rate on such loans is usually 1% to 2% higher than the FD interest rate. This is a great option if you need funds urgently but don’t want to lose out on the interest your FD is earning.

Auto-renewal Option

Many banks and NBFCs offer an auto-renewal option for FDs. When your FD matures, the principal and interest are reinvested in a new FD at the prevailing interest rate. This can be a convenient option if you don’t need the funds immediately and want to continue earning interest.

Multi-deposit Scheme

Some financial institutions offer a multi-deposit scheme, where you can divide your lump sum investment into multiple FDs with varying tenors. This allows you to access funds at different intervals while still earning interest on the remaining deposits. For example, you could invest ₹1 lakh in four FDs of ₹25,000 each, with tenors of 1, 2, 3, and 4 years, respectively. This way, you can access ₹25,000 every year without breaking the other FDs.

Tax Implications of Fixed Deposit Accounts

Interest earned on FDs is taxable under the Income Tax Act, 1961. The interest is added to your total income and taxed according to your income tax slab. If the interest earned exceeds ₹40,000 in a financial year, the bank or NBFC will deduct Tax Deducted at Source (TDS) at 10%. Senior citizens have a higher exemption limit of ₹50,000. You can avoid TDS deduction by submitting Form 15G/15H if your total income is below the taxable limit.

Who Should Consider Fixed Deposit Accounts?

FDs are suitable for individuals who prefer stability and guaranteed returns. They are ideal for retirees or those nearing retirement who cannot afford to take risks with their savings. FDs are also a good option for those saving for short-term goals, like a wedding or a vacation, as they provide a clear understanding of how much money will be available at the end of the tenor.

How to Choose the Right Fixed Deposit Account

When selecting an FD, consider the following factors:

• Interest Rate: Compare interest rates offered by different banks and NBFCs. Even a slight difference in the interest rate can have a significant impact on the maturity amount.
• Tenor: Choose a tenor that aligns with your financial goals. If you are unsure, you could opt for a shorter tenor and renew the FD upon maturity.
• Premature Withdrawal Terms: Understand the penalty for premature withdrawal and ensure it is reasonable
• Loan Facility: Check if the bank or NBFC offers a loan against FD and the applicable interest rate

Fixed deposit accounts offer a safe and flexible savings option for individuals looking to earn a steady return on their investments. While traditionally viewed as rigid, FDs have evolved to offer features like premature withdrawal, loans against FDs, and multi-deposit schemes that cater to varying financial needs. By understanding these features and considering the tax implications, you can make informed decisions that align with your financial goals. Whether you’re saving for a short-term objective or looking for a low-risk investment, FDs could be a suitable option. To get started with investing in an FD, consider visiting digital financial marketplaces like Bajaj Markets. Here, they can choose from multiple issuers to find an FD with terms and flexibility that suit their individual needs and preferences.