Types of Fixed Deposits

Introduction

Fixed deposits are investment instruments that allow investors to deposit a lump sum of money for a specific period and earn a fixed rate of interest on it. There are several types of fixed deposits available, each with its own features and benefits.

There are several types of fixed deposits in India available in the market, each with its own unique features and benefits. Here are some of the most common types of fixed deposits: 

●    Regular income Fixed Deposit
●    Senior Citizen Fixed Deposit
●    Tax-Saving Fixed Deposit
●    Flexi Fixed Deposit
●    Sweep-in Fixed Deposit
●    Corporate Fixed Deposit
 

Overview of Fixed Deposits

Fixed deposits are considered low-risk investments as they are not affected by market fluctuations and provide guaranteed returns. The interest rates offered on fixed deposits are generally higher than savings account rates, making them a popular choice for risk-averse investors. 
The tenure of fixed deposits can vary from a few months to several years, with longer tenures generally offering higher interest rates. However, breaking a fixed deposit before its maturity can result in penalty charges and lower interest rates. 
Fixed deposits are offered by banks, credit unions, and other financial institutions. Individuals can choose from a variety of fixed deposit types, including regular fixed deposits, senior citizen fixed deposits, tax-saving fixed deposits, flexi fixed deposits, sweep-in fixed deposits, and corporate fixed deposits. 
 

Types of Fixed Deposits In India

In India, several types of fixed deposits are available to investors, each with unique features and benefits. Here are some of the most common types of fixed deposits in India:

1.    Regular Fixed Deposit
This is the most common type of fixed deposit, where an individual invests a lump sum amount for a fixed period, earning a fixed interest rate. The interest rate offered on regular fixed deposits is generally higher than savings account rates.

2.    Senior Citizen Fixed Deposit
This type of fixed deposit is exclusively designed for senior citizens and offers a higher interest rate than regular fixed deposits. The eligibility age for senior citizen fixed deposits is typically 60 years or above.

3.    Tax-Saving Fixed Deposit
This type of fixed deposit is designed to help individuals save on income tax. The investments made in tax-saving fixed deposits are eligible for tax deductions under Section 80C of the Income Tax Act. The lock-in period for tax-saving fixed deposits is typically five years.

4.    Flexi Fixed Deposit
A Flexi fixed deposit offers the flexibility to withdraw or deposit funds in the account while earning interest on the balance. This type of fixed deposit allows individuals to withdraw funds without breaking the fixed deposit.

5.    Sweep-in Fixed Deposit
A Sweep-in fixed deposit is linked to an individual's savings account, and the excess balance in the savings account is automatically transferred to the fixed deposit account, earning a higher interest rate.

6.    Cumulative Fixed Deposit
In a cumulative fixed deposit, the interest earned on the principal amount is reinvested and paid out at the end of the tenure along with the principal amount. This type of fixed deposit offers higher returns compared to regular fixed deposits.

7.    Non-Cumulative Fixed Deposit
In a non-cumulative fixed deposit, the interest earned on the principal amount is paid out at regular intervals, such as monthly, quarterly, or annually. This type of fixed deposit is suitable for individuals who require regular income from their investments.
 

Types of Fixed Deposits for NRIs (Non-Residents of India )

Non-Resident Indians (NRIs) can also invest in fixed deposits in India, and there are several types of fixed deposits available to NRIs with different features and benefits. Here are some of the most common types of fixed deposits for NRIs in India:

1.    NRE (Non-Resident External) Fixed Deposit
NRE fixed deposits are denominated in Indian rupees and are fully repatriable, which means that the principal amount and interest earned can be freely transferred to the NRI's foreign bank account. The interest earned on NRE fixed deposits is tax-free in India.

2.    NRO (Non-Resident Ordinary) Fixed Deposit
NRO fixed deposits are also denominated in Indian rupees, but the interest earned is subject to taxation in India. The principal amount is fully repatriable, but the interest earned can only be repatriated subject to certain conditions.

3.    FCNR (Foreign Currency Non-Resident) Fixed Deposit
FCNR fixed deposits are denominated in foreign currencies and are fully repatriable. The interest earned on FCNR fixed deposits is tax-free in India, and the principal amount and interest earned can be sent to the NRI's foreign bank account.

4.    RFC (Resident Foreign Currency) Fixed Deposit
RFC fixed deposits are for NRIs who have returned to India and have foreign currency to invest. RFC fixed deposits are denominated in foreign currencies and are fully repatriable. The interest earned on RFC fixed deposits is taxable in India.
NRIs should carefully evaluate the interest rates, tenure, and other terms and conditions offered by various banks and financial institutions before investing in any type of fixed deposit. It is also important for NRIs to comply with the regulations set by the Reserve Bank of India (RBI) regarding investments by NRIs in India.
 

Benefits of Fixed Deposits

Fixed deposits offer several benefits to investors, including.

●    Guaranteed returns: One of the primary benefits of fixed deposits is that they offer guaranteed returns, which means that the interest rate offered at the time of investment remains fixed for the entire tenure of the investment. This provides investors with a sense of security and predictability regarding their returns.
●    Low-risk investment: Fixed deposits are considered a low-risk investment option as they are not affected by market fluctuations and provide guaranteed returns. This makes them an ideal investment option for risk-averse investors who are looking for a safe and secure investment option.
●    High liquidity: Fixed deposits provide high liquidity as investors can easily withdraw their funds before the maturity date, albeit with some penalty or loss of interest. Some banks also offer premature withdrawal facilities without any penalty in case of emergency.
●    Tax benefits: Tax-saving fixed deposits offer tax benefits as they qualify for tax deductions under Section 80C of the Income Tax Act up to a maximum limit of Rs. 1.5 lakh per financial year. Interest earned on regular fixed deposits and NRE fixed deposits is also tax-free in India up to a certain limit.
●    Flexibility: Fixed deposits offer flexibility in terms of the investment amount, tenure, and interest payout options. Some banks also offer the facility to link fixed deposits with savings accounts, allowing investors to earn higher interest rates while retaining liquidity.
●    Easy to open and maintain: Fixed deposits are easy to open and maintain as the documentation requirements are minimal, and the investment can be made online or through a bank branch.
 

How to find the Right Fixed Deposit?

1. Determine your investment goal: Before investing in a fixed deposit, you should determine your investment goals, such as long-term savings, short-term income, or tax savings.

2. Research different banks and institutions: Conduct research on different banks and financial institutions that offer fixed deposits.

3. Check interest rates: Compare interest rates offered by different banks and financial institutions.

4. Look for flexibility: Look for fixed deposits that offer flexibility in terms of tenure, interest payout options, and premature withdrawal facilities. 

5. Check credit rating: Check the credit rating of the bank or financial institution before investing in their fixed deposit. 

6. Check for safety: Ensure that the bank or financial institution is regulated by the Reserve Bank of India (RBI) and that your investment is insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), which insures deposits up to Rs. 5 lakhs per depositor per bank.

7. Seek professional advice: Seek professional advice from a financial advisor or investment expert to help you choose the right fixed deposit that meets your investment goals and suits your risk appetite.
 

Conclusion

Fixed deposits are a popular investment option in India that offer guaranteed returns, low risk, high liquidity, and tax benefits. Investors can choose from various types of fixed deposits, including regular fixed deposits, tax-saving fixed deposits, and fixed deposits for NRIs. To find the right fixed deposit, investors should consider factors such as their investment goals, interest rates, tenure, flexibility, safety, and credit rating of the bank or financial institution. 
Seeking professional advice from a financial advisor or investment expert can also help investors make informed decisions and maximise their returns. Overall, fixed deposits are a reliable and safe investment option that can help investors achieve their financial goals.