Fixed Deposit are the most traditional and common method of investment. They provide guaranteed returns and still today Fixed Deposits are considered safe and smart money back guaranteed investment by many. Because the interest provided by the Fixed Deposits are higher than what a regular savings account provides. If the money is invested for specific period as per the Bank Schemes, the amount invested plus the interest surely gets back to the investor. Fixed Deposit Rates are the Interest Rates provided in return for investing the amount.
Concept of Fixed Deposits and FD Interest Rates in Detail
So What Exactly is a Fixed Deposit?
Fixed Deposit is a lump sum amount invested in bank for a fixed tenure at an agreed rate of Interest. At the time of maturity i.e. end of the tenure amount is received back along with the compounded interest.
What are FD Interest Rates?
Interest Rates on Fixed Deposit are fixed when the deposits are opened. The Rate of Interest for Fixed Deposits differs bank to bank and the period or tenure also differs.
How Fixed Deposit Works?
Fixed Deposits are offered by Banks, Non-Banking Financial Companies, Indian Post office. The Interest rate provided is different by each one of them. The Time period of Fixed Deposits range from 7 days to 10 years. The most important rule with regards to Fixed Deposits is you can withdraw the amount invested before maturity, but there will be penalty charges. Fixed Deposit offers flexibility in choosing the time period. Some banks offer pre mature withdrawal without penalty but in such cases interest provided will be less.
What are the Different Types of Fixed Deposits?
There are different types of fixed deposits in India offered through various banks. Two major types are cumulative and non-cumulative type. In cumulative type of Deposits interest is paid along with the maturity of the Fixed deposit whereas in non-cumulative type the Interest is paid on quarterly basis or monthly or half yearly basis. It depends on the investor’s convenience. Let us understand the types of Fixed Deposits in Detail
Standard Fixed Deposits
Standard Fixed Deposits have fixed tenure and the interest rate are pre-determined by the bank. The tenure can range from 7 to 10 years. Interest rates are higher than normal savings account. It is the most popular FD chosen by the Stake holders.
Tax Saving Deposits
The Tax Saving Deposits help in saving tax and one can get exemption up to 1.5 lakh per year. These FDs have lock in period of 5 years during which the amount cannot be withdrawn and only one time lump sum deposits can be made. The amount invested gets exemption under section 80C of the Income Tax, 1961 but one thing should be remembered that the interest received through Tax Saver Deposits are Taxable.
Special Fixed Deposits
Like Standard Fixed Deposits, Special Fixed Deposits are also invested for a specific period. Special Fixed Deposits offer higher interest rates and if the amount invested is not withdrawn before the period of maturity it would be more beneficial. The name special fixed deposits are because they are issued for a special time period. Usually banks announces special deposits during festivals. The special period can be 450 days, 500 days etc.
Senior Citizen Fixed Deposit
The Senior Citizens Fixed Deposit scheme allows senior citizens who have age more than 60 years to open Fixed Deposits Account. These Fixed Deposit schemes provide an additional interest rates of around 0.50% over the regular Fixed Deposit Interest Rates.
Floating Fixed Deposit
In Floating Fixed Deposit the rate changes quarterly or yearly and people can avail the benefits of changing interest rates. The change in interest rates is determined by the Reserve Bank of India Guidelines.
Corporate and Other Fixed Deposits offering High ROI
Corporate Fixed Deposits are the ones made by the companies for a fixed tenure and at the prescribed interest rate. Financial Institutions and Non-Banking Finance Companies offer this type of deposits. In this case choosing a good company is very important as it will provide more interest rate what banks provide. It is better to check credit ratings of these companies before investing amount. These are unsecured in nature because if the company defaults investors might lose the entire amount invested.
NRE Fixed Deposits
NRE Fixed Deposits are for those who are earning foreign currency and wish to convert them to Indian Currency Value. The interest earned on NRE Fixed Deposits is Tax Free and one can get both principal and interest amount as they are repatriable. But here money deposited can be effected due to currency rate fluctuations.
NRO Fixed Deposits
The NRO Fixed Deposits is different from NRE as the interest earned through NRO deposits is taxable at 30% based on the Income Tax Act, 1961. Not only the interest earned can be completely repatriated, but also the principal amount within a certain bracket or set limit. Here there is no risk of currency rate fluctuations. The money can be invested in foreign or Indian Currency in NRO Account.
What Factors Affect The Fixed Deposits Interest Rate?
Fixed Deposit is an investment which provides high returns. It has outstanding features and benefits like Tax Savings, Guaranteed Returns, Liquidity, convenience etc. But why are the interest rates different? Let us understand
1. Investment Tenure
The Investment Tenure always has a direct relation with interest rate. Therefore long term investment can always give better returns. Generally a 10 year FD provides at least 1.5% to 3% higher returns than what lower term deposits provide. Hence Investment Tenure is very important aspect for Interest Rates.
2. Institution Type
Fixed Deposits are offered by Banks, NBFCs and Financial Institutions. Before investing it is very important to know the credit ratings of the institutions because unlike banks there is no regulatory authority to control the companies and the investor might face the risk of losing entire money. Credit bureaus like CRISIL and CARE rate fixed deposits in India after considering multiple factors. Any rating above CRISIL FAA or CARE AA is considered the best.
3. Interest Type
It depends on the investor whether they want interest on monthly, quarterly or half yearly basis. It is called Non Compounding Interest. Whereas in case of Compounding Interest the Fixed Deposit amount along with the Interest is paid at the time of Maturity.
Why Interest Rates Differ From Banks to Banks?
- Prior to reforms, RBI used to prescribe the interest rates for the fixed deposits and the maturities that could be offered by the banks. There was no competition among the banks and customers too had a very limited choice.
- As a result of the deregulation, banks are now free to fix their own deposit rates for different maturities and this increased the choices for the investors.
- Earlier RBI decided the penalty structure for pre mature withdrawal of deposits but this is now left to the banks so that banks can manage the interest rates.
- With effect from October 22, 1997, RBI has given the freedom to commercial banks to fix their own interest rates on domestic term deposits of various maturities with the prior approval of their respective Board of Directors/Asset Liability Management Committee.
- Banks should pay interest on savings deposits and term deposits, including NRE deposits, at the rates specified in Annex 1 and Annex 2 of RBI circular. A bank must obtain prior approval of its Board/ Asset Liability Management committee for fixing interest rates at various maturities.
- When depositor requests the bank, it should allow withdrawal of a term deposit before completion of the period of the deposit agreed upon at the time of making the deposit. The bank has the freedom to determine its own penal interest rate of premature withdrawal of term deposits.
- The bank should ensure that the investors are made aware of the applicable penal rate along with the deposit rate. While prematurely closing a deposit, interest on the deposit for the period that it has remained with the bank will be paid at the rate applicable to the period for which the deposit remained with the bank and not at the one as per the contract.
Top Fixed Deposit Interest Rates in India
FD Scheme | Senior Citizen | Regular |
HDFC Bank FD Interest Rate | 7.75% | 7.00% |
State Bank of India Bank FD Interest Rate | 6.90% | 6.10% |
Kotak Mahindra Bank FD Interest Rate | 6.70% | 6.20% |
IDBI Bank FD Interest Rate | 6.85% | 6.10% |
RBL Bank FD Interest Rate | 6.75% | 6.25% |
Canara Bank Fixed Deposit Rates | 6.50% | 7.00% |
Punjab National Bank Fixed Deposit Rates | 6.90% | 6.10% |
IDFC First Bank Fixed Deposit Rates | 6.50% | 6.00% |
Bank of Baroda FD interest rate | 6.35% | 7.15% |
Axis Bank FD interest rate | 7.25% | 6.50% |
Is this the Right Time to Invest in Fixed Deposits?
- Rising Interest Rates are Attractive but this cycle might come to an end. The question that comes to the mind is whether it is the correct time to invest in Fixed Deposits or one should wait more?
- Since May 2022, RBI has increased Repo Rate, the rate at which it lends money to the banks, by 225 basis points. FD rates too went up high, but the depositors expected much more interest rates.
- Generally Non-Banking Finance Companies are the ones who offer more interest rates than what is offered by the banks.
- For investors FD is fruitful if it beats inflation. If the return received from the FD is more than the inflation then it is the real rate of return. High Inflation in India has made the policy makers raise the interest rates.
- As FD’s are more secured than mutual funds and as the interest rates have increased few investors are slowly moving towards FD’s as an option.
- Though investors are getting benefited from the high interest rates there is not much upside left. Though it is good time to invest in Fixed Deposits but investing a large amount does not make sense. Laddering always helps reinvestment risk. Laddering involves investing in FD’s of various maturities ensuring cash flows at various stages. It is better to be careful before investing.
