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Fixed deposit
View on Wikipediafrom Wikipedia
 | The examples and perspective in this article deal primarily with India and do not represent a worldwide view of the subject. (October 2015) |
A fixed deposit (FD) is a tenured deposit account provided by banks or non-bank financial institutions which provides investors 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. The term fixed deposit is most commonly used in India and the United States. It is known as a term deposit or time deposit in Canada, Australia, New Zealand, and as a bond in the United Kingdom.
A fixed deposit means that the money cannot be withdrawn before maturity unlike a recurring deposit or a demand deposit. Due to this limitation, some banks offer additional services to FD holders such as loans against FD certificates at competitive interest rates. Banks may offer lesser interest rates under uncertain economic conditions.[1] The tenure of an FD can vary from 7, 15 or 45 days to 1.5 years and can be as high as 10 years.[2]
In India these investments can be safer than Post Office Schemes as they are covered by the Indian Deposit Insurance and Credit Guarantee Corporation (DICGC). However, DICGC guarantees amount up to ₹ 500000 (about $6850) per depositor per bank.[3] In India they also offer income tax and wealth tax benefits.
Functioning
[edit]Fixed deposits are high-interest-yielding term deposits and are offered by banks. 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)[citation needed].
To compensate for the low liquidity, FDs offer higher rates of interest than saving accounts.[citation needed] The longest permissible term for FDs is 10 years. Generally, the longer the term of deposit, the higher is the rate of interest but a bank may offer a lower rate of interest for a longer period if it expects interest rates, at which the Central Bank of a nation lends to banks ("repo rates"), will dip in the future.[4]
Usually the interest on FDs is paid every three months from the date of the deposit (e.g. if FD a/c was opened on 15 Feb, the first interest installment 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.[5] 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.[6]
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 percent, the interest will be paid at 5 percent. Banks can charge a penalty for premature withdrawal.[5]
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), which has to be surrendered to the bank at the time of renewal or encashment.[7]
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.
Nowadays, banks give the facility of Flexi or sweep in FD, where in customers can withdraw their money through ATM, through cheque or through funds transfer from their FD account. In such cases, whatever interest is accrued on the amount they have withdrawn will be credited to their savings account (the account that has been linked to their FD) and the balance amount will automatically be converted in their new FD. This system helps them in getting their funds from their FD account at the times of emergency in a timely manner.
Types of Fixed Deposits
[edit]Fixed deposits in India are offered in several formats depending on the depositor’s needs. Banks commonly provide regular fixed deposits, tax-saving deposits with a mandatory five-year lock-in, senior-citizen deposits that offer higher interest rates to individuals aged sixty years and above, and cumulative or non-cumulative deposits where interest is either reinvested or paid out at periodic intervals. Non-resident Indians can also open NRE and NRO fixed deposits, with NRE deposits offering tax-free interest and NRO deposits being subject to Indian tax rules. These variations allow customers to choose deposit structures based on factors such as liquidity, tax treatment, and interest payout preferences.[8]
Benefits
[edit]- Customers can avail loans against FDs up to 80 to 90 percent of the value of deposits. The rate of interest on the loan could be 1 to 2 percent over the rate offered on the deposit.[9]
- Residents of India can open these accounts for a minimum of seven days.
- Investing in a fixed deposit earns customers a higher interest rate than depositing money in a saving account.
- Tax saving fixed deposits are a type of fixed deposits that allow the investor to save tax under Section 80C of the Income Tax Act.[10]
Taxability
[edit]In India, tax is deducted at source by the banks on FDs if interest paid to a customer at any bank exceeds ₹ 10,000 in a financial year. This is applicable to both interest payable or reinvested per customer. This is called Tax deducted at Source and is presently fixed at 10% of the interest. With CBS banks can tally FD holding of a customer across various branches and TDS is applied if interest exceeds ₹ 10,000. Banks issue Form 16 A every quarter to the customer, as a receipt for Tax Deducted at Source.[11]
However, tax on interest from fixed deposits is not 10%; it is applicable at the rate of tax slab of the deposit holder. If any tax on Fixed Deposit interest is due after TDS, the holder is expected to declare it in Income Tax returns and pay it by himself.
If the total income for a year does not fall within the overall taxable limits, customers can submit a Form 15 G (below 60 years of age) or Form 15 H (above 60 years of age) to the bank when starting the FD and at the start of every financial year to avoid TDS.
How bank FD rates of interest vary with Central Bank policy
[edit]In certain macroeconomic conditions (particularly during periods of high inflation) a Central Bank 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]. These can be checked with the excess rates in the country.
See also
[edit]References
[edit]- ^ Sumant Khanderao Muranjan (1952). Modern banking in India. Kamala Pub. House. p. 80.
- ^ Mohan Lal Tannan (1965). Banking law and practice inIndia. Thacker. p. 23.
- ^ "DICGC – A guide to FD". Archived from the original on 22 August 2013. Retrieved 6 January 2014.
3. What is the maximum deposit amount insured by the DICGC? Each depositor in a bank is insured up to a maximum of 100,000 (Rupees One Lakh) for both principal and interest amount held by him in the same right and same capacity as on the date of liquidation/cancellation of bank's licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force.
- ^ R. P. Maheshwari (1997). A Complete Course in ISC Commerce. Pitambar Publishing. p. 102. ISBN 978-81-209-0643-3.
- ^ a b Raj Kapila; Uma Kapila (May 2001). India's banking and financial sector in the new millennium. Academic Ffoundation. p. 199. ISBN 978-81-7188-223-6.
- ^ Ambika Prasad Dash (2009). Security Analysis And Portfolio Management (Paperback), Second Edition. I. K. International Pvt Ltd. p. 55. ISBN 978-93-8002-610-7.
- ^ Muralidharan (2009). Modern Banking: Theory And Practice. PHI Learning Pvt. Ltd. p. 274. ISBN 978-81-203-3655-1.
- ^ "Fixed Deposit (FD) | Fixed Deposit - Times Now". www.timesnownews.com. Retrieved 9 December 2025.
- ^ Nico Swart (2004). Personal Financial "Learn to earn money" Management. Juta and Company Ltd. p. 338. ISBN 978-0-7021-5514-7.
- ^ Motiani, Preeti (19 February 2021). "Benefits of Investing in Tax Saving Fixed Deposits". The Economic Times.
- ^ Outlook Publishing (22 May 2008). Outlook Money. Outlook Publishing. p. 27.
Fixed deposit
View on Grokipediafrom Grokipedia
A fixed deposit (FD), also known as a term deposit or, in the United States, a certificate of deposit (CD), is a financial product offered by banks and non-banking financial institutions where an investor deposits a lump sum amount for a predetermined period at a fixed interest rate, ensuring guaranteed returns upon maturity.[1][2][3]
Fixed deposits operate by locking the principal amount for tenures ranging from a few days to several years, during which the funds earn interest that is typically higher than that of regular savings accounts, with options for interest payout frequencies such as monthly, quarterly, or at maturity.[4][5] Investors can choose between cumulative FDs, where interest compounds and is paid at maturity, or non-cumulative variants for periodic income, and in some jurisdictions like India, tax-saving FDs offer deductions under specific tax laws for eligible tenures of five years.[2][6]
Key benefits of fixed deposits include their low-risk nature, as the principal is protected and returns are assured regardless of market fluctuations, making them suitable for conservative investors seeking capital preservation and steady income.[4][7] They also provide flexibility, such as the ability to secure loans against the deposit at lower interest rates and options for auto-renewal at maturity, enhancing liquidity without full withdrawal.[2][6]
However, fixed deposits come with considerations such as penalties for premature withdrawal in most cases, which can reduce earnings, although some schemes allow early withdrawal without penalty, and interest income that is generally taxable, potentially lowering net returns.[7][8][9][10] Additionally, while secure, they may offer lower yields compared to equities or mutual funds and could be eroded by inflation over long tenures if rates do not outpace rising costs.[5][11]
Definition and Basics
What is a Fixed Deposit
A fixed deposit, also known as a term deposit or certificate of deposit in some regions, is a type of savings account offered by banks and financial institutions in which a depositor places a lump sum of money for a predetermined period, earning a fixed interest rate on the principal amount throughout the tenure.[1][12] The tenure typically ranges from as short as 7 days to as long as 10 years, allowing investors to lock in funds for short-term or long-term goals while receiving guaranteed returns higher than those from regular savings accounts.[13][14] Key distinguishing features include the inability to withdraw the principal before maturity without incurring a penalty, which may reduce the interest earned or impose additional fees, ensuring stability for both the depositor and the institution.[14][15] These deposits are generally considered low-risk, with principal and accrued interest often insured up to certain limits by government-backed schemes; for example, in the United States, equivalent certificates of deposit are insured by the Federal Deposit Insurance Corporation (FDIC) up to $250,000 per depositor, per insured bank, for each account ownership category.[16] Interest is accrued on the deposit over the full tenure at the agreed rate, providing predictable income.[1] Fixed deposits are available to a wide range of eligible parties, including individuals, businesses, and institutions, with minimum deposit requirements varying by provider and jurisdiction—commonly starting at $1,000 or equivalent in many cases.[17][18] While the core structure is standardized globally as a secure, time-bound investment vehicle integrated into banking systems worldwide, variations exist in terminology, interest rate levels, and regulatory protections depending on the country.[15][19]Historical Development
The concept of fixed deposits, also known as time deposits or certificates of deposit, emerged in the 19th century alongside the development of modern banking systems in Europe and the United States. In Europe, the roots trace back to the 17th century with early forms of deposit banking, but formalized time deposits gained prominence in the mid-1800s as banks sought stable funding sources amid industrial expansion. In the US, certificates of deposit were issued as early as the 1830s, with significant growth following the National Banking Acts of 1863 and 1864, which standardized national banks and encouraged the accumulation of time deposits to support economic stability. By the late 19th century, these instruments had become a cornerstone of retail banking, offering fixed interest over specified terms to attract savers wary of demand deposit volatility.[20][21] Post-World War II, fixed deposits experienced rapid growth in developing economies, particularly in Asia, as governments prioritized financial inclusion and infrastructure funding. In India, the product proliferated in the 1960s following the introduction of deposit insurance in 1961 and the nationalization of 14 major banks in 1969, which expanded banking access and promoted time deposits as a secure savings option for the middle class. This era marked a shift toward state-controlled banking that boosted deposit mobilization from rural and urban savers alike. Across Asia, widespread adoption accelerated during the economic liberalization waves of the 1980s and 1990s, as countries like Thailand, South Korea, and Indonesia deregulated interest rates and integrated into global markets, making fixed deposits a preferred vehicle for household savings amid rising incomes and financial deepening.[22][23][24][25] Key regulatory shifts in the 1980s further evolved fixed deposits in the US, where the Depository Institutions Deregulation and Monetary Control Act of 1980 phased out interest rate ceilings, enabling the introduction of variable-rate certificates of deposit to compete with money market funds. This deregulation spurred innovation but also contributed to the savings and loan crisis by exposing institutions to interest rate risks. The 2008 global financial crisis reinforced fixed deposits' role as safe havens, prompting the US Federal Deposit Insurance Corporation to temporarily raise coverage from $100,000 to $250,000 per depositor, which stabilized inflows and underscored their appeal during market turmoil.[26][27][28] In the 2010s, digital platforms transformed fixed deposit accessibility, with mobile apps and online banking enabling seamless account creation and management, particularly in regions like India and Southeast Asia where fintech adoption surged. By the 2020s, integration with sustainable investing led to the rise of green fixed deposits, where proceeds fund environmentally focused projects; for instance, major banks like Citigroup and Citizens Financial Group launched such products in 2020 and 2021, aligning savers' capital with ESG goals amid growing demand for climate-aligned finance.[29][30][31]Mechanics of Fixed Deposits
Account Setup and Terms
To open a fixed deposit account, individuals must typically provide proof of identity and address, such as a government-issued ID (e.g., passport or driver's license) and a utility bill or bank statement, along with details for any nominees or joint holders.[32][33] Minimum initial deposits vary by institution and region, often ranging from $500 to $5,000; for instance, many U.S. banks require at least $2,500, while Indian banks may start at around $120 equivalent.[34][18] Account holders select a tenure at inception and may opt for nomination to designate a beneficiary in case of the depositor's death, a feature commonly available in regions like India.[18] The core terms of a fixed deposit include a fixed principal amount that remains unchanged throughout the tenure, with the interest rate locked in at the time of account opening to protect against rate fluctuations.[35] Compounding frequency is specified upfront, typically occurring quarterly or annually in many jurisdictions, though some institutions offer monthly or daily options to enhance returns.[18][34] Early withdrawal clauses impose penalties that vary by jurisdiction; in countries like India, these often involve applying a reduced interest rate of 0.5% to 1% lower than the original for the period held, while in the US, they are typically equivalent to several months' interest (e.g., 3 to 12 months depending on tenure length).[36][34] Documentation for setup includes KYC (Know Your Customer) verification, such as PAN cards or Social Security numbers, and can be completed in-person at a bank branch or online through net banking portals for eligible customers.[18] Accounts may be opened individually, jointly (with rights of survivorship), or as recurring deposits where smaller fixed amounts are added at regular intervals; laddered fixed deposits involve spreading investments across multiple accounts with staggered maturities to manage liquidity and avoid premature withdrawal penalties. For instance, an investor might allocate ₹2–3 lakhs to 1-year fixed deposits and the rest to 2–5 year fixed deposits, ensuring periodic access to funds without incurring penalties for early withdrawal.[34][18][37][38] Tenure options range from short-term (under one year, e.g., 7 days to 12 months) for quick liquidity needs to long-term (5 years or more) for higher yields, with many banks offering auto-renewal at maturity under prevailing rates unless the holder opts out during a grace period.[39][18][34]Maturity and Withdrawal Processes
At maturity, the fixed deposit tenure concludes, and the principal amount along with the accrued interest is typically disbursed automatically to the depositor's linked savings or current account, unless an alternative option such as renewal or reinvestment has been selected in advance.[18] Many banks offer an auto-renewal facility, which reinvests the matured amount into a new fixed deposit at the prevailing interest rates for the same or chosen tenure, ensuring continuity without manual intervention.[40] Depositors are generally notified by the bank 15 to 30 days prior to the maturity date via email, SMS, or physical letter, providing an opportunity to instruct on the handling of funds.[41] Premature withdrawal before the maturity date is permitted in most cases, but it involves a penalty as per the bank's policy. In India, this often results in a reduced interest rate applied to the entire tenure—typically 0.5% to 1% lower than the original rate.[42] For instance, major Indian banks like State Bank of India and HDFC Bank levy this penalty on deposits up to certain thresholds, with variations for senior citizens who may receive concessions.[43] However, some banks offer fixed deposit schemes that allow premature withdrawal without any penalty or with minimal reduction in interest, providing enhanced liquidity compared to standard fixed deposits. Certain flexible fixed deposit schemes allow partial withdrawals, enabling depositors to access a portion of the funds without closing the entire deposit, though this is subject to specific product terms and may still attract adjusted interest calculations.[44] Following maturity, if no action is taken by the depositor, a grace period of 7 to 14 days usually applies, during which withdrawals or renewals can occur without additional penalties.[45] Beyond this period, the funds may be converted to a savings account earning lower interest, or in some cases, automatically renewed under default bank settings.[46] During or post-maturity, depositors can also secure loans against the fixed deposit as collateral, with banks offering up to 90% of the deposit value as overdraft or demand loan facilities, allowing access to liquidity while the original deposit continues to earn interest.[47] In scenarios of bank insolvency or default, fixed deposits are protected under deposit insurance mechanisms to safeguard depositors' funds. In India, the Deposit Insurance and Credit Guarantee Corporation (DICGC) provides coverage up to ₹5 lakh (approximately US$6,000) per depositor across all accounts in a single bank, encompassing both principal and interest, as of November 2025.[48] In the United States, the Federal Deposit Insurance Corporation (FDIC) insures deposits up to US$250,000 per depositor, per insured bank, for each account ownership category.[49] This insurance applies automatically to eligible deposits in member banks, with payouts processed promptly upon confirmation of the bank's failure by the relevant regulatory authority.[50]Interest Rates and Calculation
Interest Computation Methods
Fixed deposits typically accrue interest using either simple or compound methods, depending on the terms offered by the financial institution. Simple interest is calculated solely on the initial principal amount, making it straightforward for shorter tenures or when specified in the deposit agreement. The formula for simple interest is , where is the interest earned, is the principal amount, is the annual interest rate (expressed as a decimal), and is the time period in years.[51][52] For example, a $10,000 deposit at an annual rate of 5% (or 0.05) for one year yields I = 10,000 \times 0.05 \times 1 = $500 in interest.[51] In contrast, compound interest is more common for fixed deposits, especially those with tenures exceeding a few months, as it accounts for interest earned on both the principal and previously accrued interest. The standard formula for the maturity amount under compound interest is , where is the total amount at maturity, is the principal, is the annual interest rate, is the number of compounding periods per year (e.g., 4 for quarterly compounding), and is the time in years. The interest earned is then . This method results in a higher effective yield compared to simple interest due to the reinvestment effect; for instance, the effective annual yield for quarterly compounding at 5% is approximately 5.095%, calculated as .[53][54][55] Using the same example of a $10,000 deposit at 5% annual rate for one year with quarterly compounding (), the maturity amount is A = 10,000 \left(1 + \frac{0.05}{4}\right)^{4 \times 1} \approx $10,502.50, yielding $502.50 in interest.[56][57] While most fixed deposits feature fixed interest rates locked in at the time of deposit, floating rate variants exist but are rare in standard offerings, with rates tied to benchmarks like the central bank's repo rate and reset periodically.[58] Certain variations provide enhanced rates for specific depositors; senior citizens often receive a premium of 0.25% to 0.50% above the standard rate to support retirement income needs.[59][60] Additionally, tax-saving fixed deposits, available under designated schemes with a mandatory five-year lock-in, follow the same computation methods but are structured to align with eligible investment limits.[61]Influences on FD Interest Rates
Fixed deposit (FD) interest rates are primarily shaped by central bank monetary policies, which set the benchmark for borrowing costs across the financial system. In countries like India, the Reserve Bank of India (RBI) adjusts its repo rate—the rate at which banks borrow from the central bank—to control inflation and economic growth. When the RBI raises the repo rate, banks face higher funding costs and typically increase FD rates to attract deposits and maintain profitability.[62] Similarly, in the United States, the Federal Reserve's federal funds rate influences certificate of deposit (CD) rates, equivalents to FDs; rate hikes to combat inflation, such as those implemented in 2022-2023, directly elevate deposit rates as banks compete for funds.[63] This relationship often inversely ties to inflation targets: central banks elevate rates to curb rising prices, indirectly boosting FD yields to encourage saving over spending.[62] Market dynamics further modulate FD rates through bank competition, liquidity conditions, and broader economic cycles. Intense competition among banks prompts them to offer higher FD rates to secure deposits, accelerating the pass-through of central bank policy changes to consumer products.[64] In periods of tight liquidity—when banks hold fewer excess reserves—they raise deposit rates to build funding buffers and meet lending demands. Economic cycles play a key role as well; during expansions, abundant liquidity often suppresses FD rates, while recessions prompt central bank easing, generally lowering rates to stimulate borrowing, though banks may temporarily hike deposit rates amid liquidity stress to retain funds.[65][66] Regional variations reflect local benchmarks and policy environments. In India, FD rates closely track the 10-year government security (G-Sec) yield, as banks' cost of funds aligns with these risk-free instruments, influencing deposit pricing.[13] In the US, CD rates are tied to Treasury yields, with banks adjusting offerings in response to movements in these benchmarks; rising Treasury rates enable higher CD yields to remain competitive.[67] Post-2022 global inflation surges, driven by supply disruptions and energy shocks, led central banks worldwide to hike policy rates, pushing average FD and CD yields to 4-6% in major economies like the US and India by mid-2023 before gradual moderation.[68] Additional factors include depositor profiles, deposit tenure, and institutional creditworthiness. Banks often provide higher rates—typically 0.25-0.50% above standard—for senior citizens (aged 60+) to support retirement income, as permitted by regulators like the RBI.[69] Non-resident Indians (NRIs) may access competitive rates on specialized accounts like NRE or FCNR deposits, though these are generally aligned with domestic general rates rather than elevated further, with tax exemptions enhancing effective returns.[70] Longer tenures typically command higher rates, rewarding liquidity lock-in; for instance, rates often rise incrementally from short-term (under 1 year) to multi-year deposits.[13] Banks with superior credit ratings, indicating lower default risk, can offer marginally lower FD rates while still attracting depositors, whereas lower-rated institutions (e.g., some non-banking financial companies) must provide higher yields to compensate for perceived risk.[13][71]Promotional Rates Examples
Promotional rates illustrate how intense bank competition can lead to temporary elevated FD interest rates to attract deposits, often limited to fresh funds or specific conditions. In Malaysia during January 2026, various banks offered promotional fixed deposit rates typically ranging from 3.40% to 3.70% p.a. for tenures of 3 to 12 months, influenced by market dynamics and the Overnight Policy Rate (OPR) set by Bank Negara Malaysia. Key promotions included:- Bank of China: 3.55% p.a. (6 months), 3.60% p.a. (12 months), minimum deposit RM10,000 fresh funds, valid 2 January–30 April 2026.[72]
- AmBank eFD/eTD-i: 3.40% p.a. (3 months), 3.60% p.a. (6 months), 3.63% p.a. (9 months), minimum RM1,000, valid 18 January–3 March 2026.[73]
- MBSB Bank Term Deposit-i Chinese New Year Campaign: 3.55% p.a. (6 months), 3.70% p.a. (12 months), minimum RM1,000 fresh funds, valid 7 January–28 February 2026.[72]
- CIMB eFD-i: up to 3.55% p.a. (6-12 months), minimum RM1,000, valid into March 2026.[72]
- Alliance Bank Privilege Welcome Promo: 3.75% p.a. (6 months), minimum RM10,000, valid 1 January–31 March 2026.[72]