How do Fixed Deposits Work?
Last Updated : June 13, 2020, 12:48 p.m.
Fixed Deposit is a product that provides an assured return on your deposits for the tenure you choose. It is a type of savings account opened with a bank where an assured rate of interest is paid for fund deposit. But how does a Fixed Deposit work? Read the post below and know the answer to this question.
Modus Operandi of Fixed Deposits
In a Fixed Deposit , a sum of amount is provided to the bank for a fixed period of deposit. And you have the freedom to choose the duration of your deposit which is flexible and can range from 7 days to 10 years. The interest rate on your FD is dependent on the period you choose. Banks may offer you the premature withdrawal facility but it can lead to an interest penalty of 1%-2%.
Before you deposit, make sure you calculate the possible earnings you’ll have at the end of tenure for which you can use a FD calculator . To use this tool, you need to enter the maturity period, expected return and deposit amount. With the mathematical expression of A = P (1+R/100) ^N, your interest earning is calculated annually. And if the interest is credited quarterly, the formula for this would be A= P (1+(R/4)/100) ^4N. Here, A is the maturity amount, R is the interest rate, N is tenure and P is the deposit amount.
Fixed Deposit Maturity Instructions
Before you book an FD, you are required to make maturity instructions for it such as auto-renewal, closure, premature withdrawal, etc.
Auto-renewal
Your fixed deposits will be automatically extended to 1 year or more as per your renewal plan. And you can choose the tenure as per the interest you want to earn from your investment.
FD Closure
The principal and the interest amount are liquidated automatically and transferred to your savings account. If you want to close the fixed deposit account on maturity, visit your bank and submit the fixed deposit certificate. After the closure, you need to give further instructions like whether you want to close the FD, renew it, or move the funds into a new FD.
Partial Closure
Before closing the FD before maturity, evaluate the penalty charges that the bank will levy. You can withdraw only a portion of your deposit while the rest of the deposit will incur interest. For partial closure, you can change the maturity instructions by going to the bank website or calling the customer service center using the toll-free number.
What are the benefits of a Fixed Deposit?
- Guaranteed Returns: One of the main motives of investing in a fixed deposit is the fact that it assures returns. This means there are no risks as compared to investments such as mutual funds. For the chosen maturity period, the interest is paid monthly, quarterly or annually.
- Easy to open: You can open an FD account in a few minutes. You can either open it online or walk into your nearest bank to do so.
- Higher interest rate: Fixed deposits enable customers to earn a higher rate of interest as compared to their savings account or any other form of term deposits.
- Flexible Tenure: You can choose to open a fixed deposit account for a period of 7 days to 10 years.
- Multiple FD accounts: You can hold more than one FD account at a given point of time.
- Tax Benefit: You can claim for a tax exemption under Section 80C of the Income Tax Act of India for a sum of up to INR 1,50,000 if you invest in a tax-saving fixed deposit scheme.
Now that you understand how a Fixed Deposit works, go ahead and open your very own Fixed Deposit today!