Fixed Deposit (FD)

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A Fixed Deposit (FD) is a financial instrument offered by banks and non-banking financial companies (NBFCs) in India, where an individual deposits a lump sum amount for a fixed tenure at a predetermined interest rate. FDs are popular among conservative investors due to their safety and guaranteed returns.

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Types of Fixed Deposits in India

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• Regular Fixed Deposit :

  • ​Standard FD where money is deposited for a fixed tenure, typically ranging from 7 days to 10 years.

  • Interest rates vary based on the tenure and the bank.

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• Tax-Saving Fixed Deposit :

  • Offers tax benefits under Section 80C of the Income Tax Act.

  • Minimum lock-in period of 5 years.

  • Interest earned is taxable.

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• Senior Citizen Fixed Deposit : 

  • ​Special FDs for senior citizens (aged 60 years and above).

  • Higher interest rates compared to regular FDs.

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• Recurring Deposit :

  • Allows individuals to deposit a fixed amount regularly (monthly) for a specified tenure.

  • Suitable for those who want to save a fixed amount periodically.

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• NRE/NRO Fixed Deposit :

  • Non-Resident External (NRE) and Non-Resident Ordinary (NRO) FDs are for NRIs.

  • NRE FDs are tax-free in India, while NRO FDs are subject to tax.

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• Flexi Fixed Deposit :

  • Combines features of savings and fixed deposits.

  • Allows withdrawal of funds while earning interest on the remaining balance.​

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Pros of Fixed Deposits

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• Safety : ​FDs are considered low-risk investments as they are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5 lakh per depositor per bank.

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• Guaranteed Returns : Fixed interest rates ensure predictable returns, making it easier to plan finances.

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• Flexible Tenure : Investors can choose the tenure that suits their financial goals.

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• Loan Against FD : Banks offer loans against FDs, allowing liquidity without breaking the deposit.

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• Tax Benefits : Tax-saving FDs provide tax deductions under Section 80C.

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Cons of Fixed Deposits​

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• Lower Returns Compared to Other Investments : FDs generally offer lower returns compared to equities or mutual funds, especially in a high-inflation environment.

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• Liquidity Issues : Funds are locked in for the tenure, and premature withdrawal may incur penalties.

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• Taxation on Interest : Interest earned is taxable, which can reduce overall returns, especially for higher tax brackets.

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• Inflation Risk : The fixed interest rate may not keep pace with inflation, leading to a decrease in real returns.

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• Limited Growth Potential : FDs do not provide the potential for capital appreciation like stocks or mutual funds.

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In summary, Fixed Deposits are a suitable investment option for risk-averse individuals looking for stable returns. While they offer safety and guaranteed returns, investors should consider their financial goals and the impact of inflation and taxation when choosing FDs as part of their investment strategy.