Contents
Definition
A fixed deposit (FD), also called a term deposit, is a deposit placed with a bank or post office for a fixed tenure at a pre-agreed interest rate. The rate is locked at booking and does not change with market movements during the tenure. Scheduled commercial banks, small finance banks, co-operative banks, and NBFCs (as company deposits under Companies Act, 2013) all offer variants. The RBI deregulated interest rates on term deposits (other than savings deposits) effective October 2011 (circular DBOD.Dir.BC.12/13.03.00/2011-12), allowing banks to offer market-linked competitive rates.
How It Works Mechanically
At booking, the depositor chooses: (a) cumulative — interest compounds quarterly and is paid at maturity along with principal; or (b) non-cumulative — interest paid periodically (monthly, quarterly, half-yearly, annually). For cumulative FDs, the Effective Annual Rate (EAR) exceeds the stated rate because of compounding. Banks issue a Fixed Deposit Receipt (FDR) or a digital certificate of deposit. On maturity, most banks auto-renew at the prevailing rate unless the depositor opts out. Premature withdrawal is permitted but attracts a penalty (typically 0.5%–1% reduction in the applicable rate for the actual holding period); the RBI mandates that banks disclose their premature withdrawal policy upfront. Senior citizens generally receive an additional 0.25%–0.50% p.a. on the stated rate. Deposit insurance under DICGC covers up to ₹5 lakh per depositor per bank across all deposit types combined.
Tax Treatment / Fees / Limits
FD interest is taxable as income from other sources under the Income Tax Act, 1961, in the year it accrues (not just when paid). Banks deduct TDS at 10% if aggregate FD interest from a branch exceeds ₹40,000 in a year (₹50,000 for senior citizens, per Finance Act 2019). If no PAN is furnished, TDS is deducted at 20%. Depositors expecting total income below the basic exemption limit may submit Form 15G (or Form 15H for senior citizens) to prevent TDS deduction. Senior citizens can additionally claim up to ₹50,000 p.a. under Section 80TTB. There is no statutory minimum or maximum FD amount; individual bank policies apply.
Common Use Case
An NRI investor parking a FCNR(B) deposit for a 1-year period to earn guaranteed rupee returns. Domestic depositors use FDs for goal-based savings (e.g., a home down payment in 3 years), laddering maturities quarterly to maintain liquidity while capturing higher rates on longer tenures. FDs are also used as collateral for overdraft facilities (OD against FD) at typically 1%–2% above the FD rate.
Worked Example
Rajesh books a cumulative FD of ₹5,00,000 for 1 year at 7.00% p.a., compounded quarterly.
- Quarterly rate = 7% ÷ 4 = 1.75%
- Q1 interest = ₹5,00,000 × 1.75% = ₹8,750; balance = ₹5,08,750
- Q2 interest = ₹5,08,750 × 1.75% = ₹8,903; balance = ₹5,17,653
- Q3 = ₹9,059; balance = ₹5,26,712 | Q4 = ₹9,217; maturity = ₹5,35,929
- EAR ≈ 7.19% vs stated 7.00%
- Taxable interest = ₹35,929; TDS applicable at 10% = ₹3,593 (since ₹35,929 > ₹40,000 threshold only if cumulated across all FDs at branch)
If Rajesh withdraws after 8 months (premature), the bank applies the 6-month rate (say 6.50%) minus 1% penalty = 5.50% for the actual 8-month holding period.
See Also
- Savings Account
- Recurring Deposit
- NEFT
- Debt Laddering Strategy
- DICGC — Deposit Insurance and Credit Guarantee Corporation
Primary Source
RBI Master Direction — Interest Rate on Deposits (2016, updated) | DICGC Deposit Insurance
Disclosure: MintByte Investment Advisors LLP (ARN-314872, APMI APRN-01658) is a SEBI-registered investment adviser. This article is for educational purposes only and does not constitute advice to open or close any fixed deposit. MintByte does not hold a banking licence and does not recommend specific banks.