A fixed deposit (FD) is a financial instrument provided by Indian banks which provides investors with a higher rate of interest than a regular savings account, until the given maturity date . It may or may not require the creation of a separate account. It is known as a term deposit or time deposit in Canada, Australia, New Zealand, and the US, and as a bond in the United Kingdom. They are considered to be very safe investments. Term deposits in India is used to denote a larger class of investments with varying levels of liquidity. The defining criteria for a fixed deposit is that the money cannot be withdrawn for the FD as compared to a recurring deposit or a demand deposit before maturity. Some banks may offer additional services to FD holders such as loans against FD certificates at competitive interest rates. It's important to note that banks may offer lesser interest rates under uncertain economic conditions. The interest rate varies between 4 and 11 percent.
[1] The tenure of an FD can vary from 10, 15 or 45 days to 1.5 years and can be as high as 10 years.
[2] These investments are safer than Post Office Schemes as they are covered under the Deposit Insurance & Credit Guarantee Scheme of India. They also offer income tax and wealth tax benefits.
Explanation
Fixed deposits are a high-interest-yielding Term deposit offered by banks in India. The most popular form of Term deposits are Fixed Deposits, while other forms of term Deposits are Recurring Deposit and Flexi Fixed Deposits (the latter is actually a combination of Demand deposit and Fixed deposit).
To compensate for the low liquidity, FDs offer higher rates of interest than saving accounts. The longest permissible term for FDs is 10 years. Generally, the longer the term of deposit, higher is the rate of interest but a bank may offer lower rate of interest for a longer period if it expects interest rates, at which RBI lends to banks ("repo rates"), will dip in the future.
[3] Usually in India the interest on FDs is paid every three months from the date of the deposit. (e.g. if FD a/c was opened on 15th Feb., first interest instalment would be paid on 15 May). The interest is credited to the customers' Savings bank account or sent to them by cheque. This is a Simple FD.
[4] The customer may choose to have the interest reinvested in the FD account. In this case, the deposit is called the Cumulative FD or compound interest FD. For such deposits, the interest is paid with the invested amount on maturity of the deposit at the end of the term.
[5] Although banks can refuse to repay FDs before the expiry of the deposit, they generally don't. This is known as a premature withdrawal. In such cases, interest is paid at the rate applicable at the time of withdrawal. For example, a deposit is made for 5 years at 8%, but is withdrawn after 2 years. If the rate applicable on the date of deposit for 2 years is 5 per cent, the interest will be paid at 5 per cent. Banks can charge a penalty for premature withdrawal. Banks issue a separate receipt for every FD because each deposit is treated as a distinct contract. This receipt is known as the Fixed Deposit Receipt (FDR), that has to be surrendered to the bank at the time of renewal or encashment.
[6] Many banks offer the facility of automatic renewal of FDs where the customers do give new instructions for the matured deposit. On the date of maturity, such deposits are renewed for a similar term as that of the original deposit at the rate prevailing on the date of renewal. Income tax regulations require that FD maturity proceeds exceeding Rs 20,000 not to be paid in cash. Repayment of such and larger deposits has to be either by " A/c payee " crossed cheque in the name of the customer or by credit to the saving bank a/c or current a/c of the customer.
Some Benefits of FD
Customers can avail loans against FDs up to 80 to 90 per cent of the value of deposits. The rate of interest on the loan could be 1 to 2 per cent over the rate offered on the deposit.
[7] Non resident Indians and a Person of Indian Origin can also open these accounts.
Taxability
Tax is deducted by the banks on FDs if interest paid to a customer at any branch exceeds Rs. 10,000 in a financial year. This is applicable to both interest payable or reinvested per customer or per branch. This is called Tax deducted at Source and is presently fixed at 10% of the interest. Banks issue Form 16 A every quarter to the customer, as a receipt for Tax Deducted at Source.
[8] If the total income for a year does not fall within the overall taxable limits, customers can submit a Form 15 G (below 65 years of age) or Form 15 H (above 65 years of age).
How bank FD rates of interest vary with RBI policy.
In certain macroeconomic conditions (particularly during periods of high inflation) RBI adopts a tight monetary policy, that is, it hikes the interest rates at which it lends to banks ("repo rates"). Under such conditions, banks also hike both their lending (i.e. loan) as well as deposit (FD) rates. Under such conditions of high FD rates, FDs become an attractive investment avenue as they offer good returns and are almost completely secure with no risk[citation needed].
In finance, a bond is an instrument of indebtedness of the bond issuer to the holders. It is a debt security, under which the issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay them interest (the coupon) and/or to repay the principal at a later date, termed the maturity date.[1] Interest is usually payable at fixed intervals (semiannual, annual, sometimes monthly). Very often the bond is negotiable, i.e. the ownership of the instrument can be transferred in the secondary market. This means that once the transfer agents at the bank medallion stamp the bond on the second market the bond is highly liquid. [2]
Thus a bond is a form of loan or IOU: the holder of the bond is the lender (creditor), the issuer of the bond is the borrower (debtor), and the coupon is the interest. Bonds provide the borrower with external funds to finance long-term investments, or, in the case of government bonds, to finance current expenditure. Certificates of deposit (CDs) or short term commercial paper are considered to be money market instruments and not bonds: the main difference is in the length of the term of the instrument.
Bonds and stocks are both securities, but the major difference between the two is that (capital) stockholders have an equity stake in the company (i.e. they are investors), whereas bondholders have a creditor stake in the company (i.e. they are lenders). Being a creditor, bondholders have absolute priority and will be repaid before stockholders (who are owners) in the event of bankruptcy.[3] Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed, whereas stocks are typically outstanding indefinitely. An exception is an irredeemable bond, such as Consols, which is a perpetuity, i.e. a bond with no maturity.