February 7th, 2023
Types of Fixed Deposits in India & How to Choose the Best Fixed Deposit?
Fixed deposits are a form of investment best suited for risk-free investors. It allows them to invest their money for a fixed period of time at a fixed interest rate. Fixed deposit interest rates are predefined based on the term. The interest rates are slightly higher for senior citizens, and the percentage is discretionary to the financial institution.
Once depositors meet fixed deposit eligibility criteria and submit the documents required for a fixed deposit, their money gets locked in for a set tenure.
If, for any reason, depositors need to break the FD before the lock-in period concludes, a premature withdrawal penalty is charged, and they lose out on some interest. For a HFC like PNB Housing Finance, the lock–in period is 3 months.
Different Types of Fixed Deposits
There are various types of fixed deposits offered by financial institutions. Here are a few common ones:
1. Standard Fixed Deposits
Almost every financial institution offers this type of fixed deposit to its customers. When depositors opt for a standard fixed deposit, their money is invested for a fixed period, and they get an FD interest rate that is fixed depending on the deposit tenure.
Common features include:
- Fixed term ranging from seven days to ten years. For HFC FD, the tenure ranges between 1 year to 10 years.
- Pre-defined rate of interest that is not subject to change by market fluctuations
- Higher FD interest rate as compared to a savings account deposit.
2. Tax-Saving Fixed Deposit (Only Applicable for Banks & Post Office FDs)
A tax-saving fixed deposit requires depositors to invest their money for at least five years. The amount invested in a tax-saving FD qualifies for tax exemption under section 80C of the Income Tax Act. The interest earned on this FD is eligible for a tax deduction.
Common features are:
- Five years minimum lock-in period
- Tax exemption up to Rs 1.5 lakh
- Only lump-sum deposits can be made
Must Read: How to Open Fixed Deposit Account Online?
3. Special Fixed Deposits
These FDs are called ‘special’ because they are available for special tenures. This period can be any random number of days (offered in Banks), such as 290 or 390. Due to the higher interest rates on special FDs, they are a popular investment option. The features of special fixed deposits are:
- Investment for a specific tenure.
- Money cannot be withdrawn until the tenure ends
- Special Fixed Deposit interest rates are higher than Standard Fixed Deposit interest rates
4. Cumulative Fixed Deposits
The interest on these FDs gets compounded as per the chosen tenure. At maturity, interest is added to the investment amount.
5. Non-Cumulative Fixed Deposit
As opposed to cumulative FDs, the interest here is paid at regular intervals.
Some features are:
- The interest is paid according to the frequency set at the time of opening the FD – this could be yearly, monthly, bi-annually, or each quarter.
- This type of investment is more suited for retired people or pensioners looking to get a regular inflow of funds.
6. Senior Citizen’s Fixed Deposit
As the name suggests, this FD is exclusively for senior citizens over the age of 60.
The features of the senior citizen’s fixed deposit are:
- The interest rate for senior citizens is around 0.25% to 0.75% more than standard FD interest rates. PNB Housing offers 0.25% additional ROI for Sr. citizens.
- Flexible terms
How to Choose the Best Fixed Deposit?
To choose the most suitable fixed deposit, depositors must evaluate certain aspects:
1. Term of the Fixed Deposit
FD interest rates vary with tenure; the more tenure, the higher the interest rate. FDs with longer terms may appear to be better, but since the deposited money is locked up for longer periods, the investor’s liquidity is hampered. Thus, it’s imperative to opt for an FD that offers tenure flexibility based on the depositor’s financial situation and goals.
2. Premature Withdrawal Terms
Before choosing a fixed deposit, it is advisable to evaluate the premature withdrawal terms and penalties. They should have the freedom to liquidate their FD and not at a very high price.
Must Read: Everything You Need to Know About Term Deposit
3. Rate of Interest
The main reason for opening FDs is to earn interest on them. Choose a financial institution that offers competitive FD interest rates.
4. Additional Benefits
Don’t just go by the interest rates; look for some added benefits. These include auto-renewal options, a facility of loan against the Fixed Deposit, an overdraft facility for high liquidity, and other such features.
There are various investment options available, yet Fixed deposits continue to be a favoured choice amongst investors. This is because the safe and secure nature of FDs guarantees fixed returns and stable growth. With different types of fixed deposits to choose from, depositors will find a suitable one for their money.
