Introduction to Banking
It’s been three months since Satish has started working and has opened a savings bank account where his salary is credited every month. Satish has been able to save some money and wants to invest the fund to earn some returns. However, this being his first savings, he does not want to risk the fund and is looking for an option where his money would be secure.
Satish searched the internet and started reading about Fixed Deposits.
So, what is a Fixed Deposit?
A Fixed Deposit, more commonly referred to as an FD, is an investment account held with the bank where the bank promises the investor to pay a fixed rate of interest for a certain time period. The condition to obtain the interest amount is that the money should remain with the bank for a mutually agreed period of time.
Features of Fixed Deposits
Fixed Deposits are a safe investment option since the investment amount i.e. the principle remains secured.
The time period for which a fixed deposit is made may vary. In India, customers may choose to invest their funds for as low as 7 days to as high as 10 years.
- The rate of interest on fixed deposits varies from one bank to another.
- The rate of return paid by the bank on a fixed deposit depends on the time period for which the money has been fixed.
- The return on fixed deposit, though calculated annually, is paid monthly or quarterly.
- The interest amount can be taken by the customer monthly, quarterly, half-yearly, annually, or upon maturity of the fixed deposit.
- In case customers do not withdraw the interest before the maturity of the fixed deposit, the monthly or quarterly return is reinvested, yielding a higher return for the customer. This is known as cumulative interest.
- In most cases, fixed deposits can be withdrawn prior to the maturity date. This process is known as the premature withdrawal of fixed deposits. However, a penalty has to be paid for premature withdrawal.
- Some banks offer loan facility against fixed deposits.
Interest Calculation on Fixed Deposits
Fixed Deposit interest is calculated based on the formula provided below:
M = Maturity Amount
P = Deposit Amount
m = Frequency at which interest is compounded in an year
n = Number of Years
r = Rate of return (%)
Auto-Renewal of Fixed Deposits
Most banks offer an auto-renewal facility on fixed deposits. In the case of auto-renewal, the customer authorizes the bank to automatically reinvest the money upon the maturity of a fixed deposit. Hence, a new fixed deposit is automatically created upon the maturity of the old one.
Tax on Fixed Deposits
According to the Interim Budget 2019-2020, fixed deposit interests are fully taxable at the slab rate. In case the interest on all fixed deposits held by a customer in the same branch of a bank exceeds ₹40,000 in a year, then Tax Deducted at Source (TDS) is deducted by the concerned bank. For senior citizens, this limit is ₹50,000. The rate of TDS is 10% for resident Indians and 30% for Non-Resident Indians. The rate will be 20% for resident India if he/she has not provided their PAN to a particular bank. In case the income from all sources of a resident Indian is less than Rs 2.5 lakhs per annum, then he/she can submit Form 15 G to inform the bank to not deduct TDS. In the case of senior citizens, Form 15 H has to be submitted.