Understanding How Fixed Deposits Work


Fixed deposits (FDs) are a popular savings tool in India, providing a safe investment option with assured returns. They offer a higher interest rate compared to a regular savings account, making them an attractive choice for conservative investors. So, how does an FD work? Understanding this can help you make informed decisions and maximise your returns.

How Does an FD Work?

A fixed deposit involves depositing a lump sum amount with a bank or Non-Banking Financial Company (NBFC) for a predetermined tenor at a specified interest rate. Upon maturity, you receive the principal amount along with the interest earned. The interest rate for FDs is usually higher than that of savings accounts, and it remains fixed for the entire tenor of the deposit.

  1. Principal Amount: This amount can vary depending on the bank or NBFC's minimum deposit requirement.

  2. Tenor: This is the duration for which the money is deposited in the FD. It can range from a few months to several years. Banks and NBFCs offer different interest rates for different tenors.

  3. Interest Rate: Interest rates for FDs are determined by the bank or NBFC and are influenced by factors like RBI policies and market conditions.

  4. Compounding Frequency: Interest on FDs can be compounded monthly, quarterly, half-yearly, or annually. The frequency of compounding affects the total interest earned.

Benefits of Fixed Deposits

  1. Safety: FDs are one of the safer investment options as they are not affected by market fluctuations. The principal amount is secure, and you receive a guaranteed return.

  2. Fixed Returns: Unlike market-linked instruments, FDs provide assured returns. You know the exact amount you will receive at the end of the tenor.

  3. Flexible Tenors: FDs offer flexible tenors ranging from a few months to several years, allowing you to choose a tenor that aligns with your financial goals.

  4. Loan Against FD: In times of financial need, you can avail of a loan against your FD. Issuers typically offer loans up to a percentage of the FD amount.

Using FD Calculators

When considering opening an FD with issuers, such as YES Bank, FD calculators can be useful tools. It helps you estimate the maturity amount and the interest earned based on the principal amount, interest rate, and tenor. Here’s how to use an FD calculator effectively:

  1. Input Principal Amount: Enter the amount you plan to invest in the FD.

  2. Select Tenor: Choose the duration for which you want to keep your money deposited.

  3. Enter Interest Rate: Input the interest rate offered by the bank or NBFC.

  4. Select Compounding Frequency: Choose how frequently the interest should be compounded.

The calculator will then provide the maturity amount and the total interest earned. This helps you compare different FD options and make an informed decision.

Suppose you invest ₹1,00,000 in an FD with YES Bank for a tenor of 5 years at an interest rate of 6.5% p.a., compounded quarterly. By using an FD calculator, you can quickly determine the maturity amount and the total interest earned over the period.

Tax Implications

Interest earned on FDs is taxable under the Income Tax Act, 1961. It is included in your income and taxed as per your income tax slab. Banks also charge TDS (Tax Deducted at Source) on the interest if it exceeds ₹40,000 in a financial year (₹50,000 for senior citizens).

Understanding how FDs work is crucial for making informed investment decisions. By knowing the components like principal amount, tenor, interest rate, and compounding frequency, you can choose the best FD option. When considering issuers, FD calculators can be useful tools to estimate returns and compare various FD schemes. This ensures you maximise your earnings while keeping your investment safe.
Location: India

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