What is a fixed deposit?

Imagine this. You’ve got some extra money lying in your savings account. It’s just sitting there, earning tiny bits of interest every month. You want that money to grow, but you don’t want to risk losing it either. So, what do you do in this situation? 

This is where Fixed Deposits (FDs) come into the picture. 

So, what is a fixed deposit? 

A fixed deposit (FD) is one of the oldest and most trusted ways to save and grow money in India. It is a savings instrument offered by banks and non-banking financial companies (NBFCs). You can think of it as you lending your money to a bank for a set period, which could be as short as 7 days or as long as 10 years, and in return, the bank promises to pay you back with guaranteed interest.

FDs are popular because they are simple, low-risk, and give predictable returns. One does not have to track markets or be worried about price fluctuations.

How Does an FD Work?

When you open an FD, you choose:

• the amount you want to deposit
• the tenure (ranging from 7 days to 10 years) – depending on your preference
• the type of payout (lump sum at maturity or regular interest payouts) 

When you open an FD, you place a lump sum with the bank at a predetermined FD interest rate. During this period, the bank holds your money and pays you interest on it. You can decide how you want to get the interest – either have it reinvested and received along with your principal at maturity, or receive it as periodic payouts every month, quarter, half-year, or year.

At the end of the term, you get your original amount (the FD principal) plus the interest earned. The interest rate does not change throughout the tenure, so you know exactly how much you will get at maturity. If you withdraw the FD before maturity, the bank may charge a penalty and reduce the interest.

Because the rate stays fixed from the day you open the FD, your returns remain unaffected by market ups and downs. This makes FDs a safe option, especially for short- and medium-term goals.

Types of Fixed Deposits

1. Regular Fixed Deposit

This is the most widely used type of FD. You place a lump sum with the bank for a fixed tenure and earn interest at a predetermined rate. The interest can be paid out monthly, quarterly, half-yearly, or annually, as per your preference. It offers stable, predictable FD returns that can help you work towards various financial goals.

2. Tax-Saving Fixed Deposit

This FD is designed to help you save on income tax.

• It has a lock-in of 5 years – you cannot withdraw before that.
• You can claim a deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act.

It’s useful when you want safe returns and also want to lower your taxable income. Just remember, the interest you earn is still taxable and deducted at source(TDS).

3. Cumulative Fixed Deposit

In a cumulative FD, the interest you earn is not paid out immediately. Instead, it is added back to your principal after each compounding period. This way, you earn interest on the interest, which can grow your money faster over time. You receive the full amount (principal + accumulated interest) at FD maturity.

It’s a good choice when you don’t need regular income and are saving for a future goal – like buying a car in three years or building a wedding fund.

4. Non-Cumulative Fixed Deposit

Here, the bank pays you the interest at regular intervals – monthly, quarterly, half-yearly, or annually. This allows you to have a steady stream of income during the FD’s tenure. The principal stays locked in until maturity.

It’s suitable if you want a steady income stream from your investment, such as retirees or anyone who relies on FD interest payouts for daily expenses.

5. Senior Citizen Fixed Deposit

These FDs are specifically for individuals aged 60 and above.

• Banks usually offer between 0.25% to 0.75% higher FD rates.
• Senior citizens can also get higher TDS exemption limits (₹1,00,000 per year) on the interest.

It’s a safe and stable way for older investors to earn slightly better returns and generate regular income.

6.  Flexi Fixed Deposit

A Flexi FD is linked to your savings account.

• When your savings account balance crosses a set limit, the extra money automatically moves into an FD.
• If you need funds, the bank breaks only the required portion of your FD and puts it back into your account.

It combines the liquidity of a savings account with the higher returns of an FD, which makes it a convenient option if you want to earn better interest without locking up all your money.

Advantages of a Fixed Deposit

FDs are widely used because they offer several clear benefits:

• Safety: Your principal is protected, and banks are regulated by the Reserve Bank of India (RBI).
• Guaranteed returns: You know in advance how much you will get at the end of the term.
• Flexible tenures: You can choose a period that suits your goals, ranging from a few days to several years.
• A simple process: Opening an FD is quick and can be completed online with minimal paperwork.
• Loan facility: In case of urgent need, you can take a loan against your FD without breaking it.
• Higher returns than savings accounts: FD interest rates are generally higher than savings account rates.

These features make FDs a stable and predictable investment option.

Even though fixed deposits are considered safe and stable, they do come with certain risks and trade-offs. It’s important to be aware of these before investing:

1. Inflation Risk

FD interest rates are fixed, but the cost of goods and services (inflation) keeps rising. If inflation grows faster than your FD’s returns, the real value of your money goes down over time, meaning your savings might buy you less in the future.

2. Liquidity Risk

When you invest in an FD, your money is locked in for the chosen tenure. If you need to withdraw early, you’ll have to break the FD, which usually comes with penalties and lower interest. This makes FDs less flexible than other options.

3. Interest Rate Risk

The interest rate on your FD stays fixed throughout its tenure. If market interest rates go up after you’ve booked your FD, you miss the chance to earn those higher rates on your money.

4. Credit Risk

There’s a small possibility that the bank or financial institution you invested with could face financial trouble or default. While this risk is low for large regulated banks, it can be higher for company (corporate) FDs, which will depend on the firm’s financial health.

5. Opportunity Cost

Locking money in an FD means you might miss out on other investments that could offer better returns, like stocks or mutual funds. If other markets perform well, your FD’s fixed returns might be low in comparison.

6. TaxabilityThe interest you earn on an FD is taxable as per your income tax slab. This can reduce your actual (post-tax) earnings, especially if you fall into a higher tax bracket.

Who Can Invest in a Fixed Deposit?

Fixed deposits in India are suitable for a wide range of investors:

• Indian nationals: Resident individuals can open FDs in their own name or jointly with others.
• Non-Resident Indians (NRIs): NRIs can open FDs through NRE (Non-Resident External) or NRO (Non-Resident Ordinary) accounts.
• Minors: Parents or guardians can open an FD on behalf of a minor child.
• Senior citizens: Individuals aged 60 years and above can open FDs and also get higher interest rates.
• Sole proprietors (single-person businesses): Individuals running their own businesses can invest business funds in FDs.
• Partnership firms: Registered partnership firms can open FDs in the firm’s name.
• Companies: Private and public limited companies can park surplus funds in FDs.
• Clubs, associations, or societies: These registered entities can also invest their surplus funds in FDs.
• Joint investors or groups: Two or more individuals can open a joint FD together.

With so many modern investment options available, it is natural to wonder if FDs are still relevant. They are still relevant because they serve a clear purpose. Not every rupee you save needs to chase high returns. Some of it needs to stay safe, liquid, and predictable.

FDs do exactly that. They do not depend on market movements, they do not need monitoring, and they bring stability to your overall portfolio. That is why they continue to be a part of most Indian households’ savings habits.

A fixed deposit is a straightforward and dependable way to grow your savings. It will not give extraordinary returns, but it will give you certainty. You can decide the amount and the period, and you know exactly what you will get at the end.

For anyone who wants a safe, predictable, and easy-to-manage investment option, a fixed deposit remains a useful choice. It can quietly support your short-term goals, build your emergency fund, or simply give your savings a steady push forward.