Fixed Deposits

There are primarily two types of Fixed Deposits – Cumulative FDs and Non – Cumulative FDs. 

Cumulative Fixed Deposits:
In cumulative FDs, the interest earned is reinvested in the FD account at regular intervals (usually quarterly or annually), leading to compounding of interest. The maturity amount includes both the principal and accumulated interest.

Non – Cumulative Fixed Deposits: 

Unlike cumulative FDs, non-cumulative FDs pay out interest earnings periodically, either monthly, quarterly, half-yearly, or annually, depending on the investor’s preference. The investor does not enjoy compounding benefits here.

Income from the interest of fixed deposits is taxable as per the Income Tax Act,1961. 

The interest from FDs is added to the investor’s total income and is taxed as per the applicable income tax slab rate. 

Investors can avail deduction of up to INR 1.5 lakh for their investment in an FD under Section 80C of the Income Tax Act. This deduction is the principal amount invested in Tax – Saver FDs.

A fixed deposit functions like a loan given by the investor to a bank or NBFC or corporate. When you opt for a FD, you are essentially lending money to the institution. In return, the institution promises to repay the principal amount along with interest at the end of the agreed-upon tenure, known as the maturity period. Meanwhile, the institution utilizes these funds to extend loans to other borrowers, charging them interest. A portion of the interest earned from these loans is then passed on to you as the investor.

Fixed deposits enable you to earn higher interest on the surplus funds in your savings account. FDs enable you to invest a lumpsum amount for a specific tenure and pre-determined interest rate.

The FD interest you receive depends on the amount you invest as well as the tenure of investment. Different banks and NBFCs have pre-determined interest rates based on the duration. 

The interest accrued on a fixed deposit depends on the invested amount, the offered interest rate and the investment duration. The fundamental formula for calculation FD interest is: 

Interest on FD = Amount Invested X Interest Rate X (Duration / 12 months​)

However, the output will depend on whether you opt for a cumulative FD or non-cumulative FD. A cumulative FD is one where you will not receive the interest every year, but will receive it at the time of maturity. A non-cumulative FD is one where you will receive the interest annually.

For instance, suppose you invest ₹1,00,000 for 3 years at an interest rate of 7.5% per annum. In a cumulative FD scenario, the maturity value would be ₹1,23,438.

On the other hand, non-cumulative FDs pay out interest periodically, lacking the compounding effect. Additionally, their interest rates typically trail those of cumulative FDs.

You are eligible to invest in FDs if you fall under the following categories:

1. Resident of India
2. Non- resident Indian (NRI)
3. Senior Citizen
4. Minor
5. Hindu Undivided Families (HUF)
6. Sole proprietorship firms
7. Trust accounts
8. Limited companies
9. Partnership firms