Fixed Deposit (FD): Interest Rates, Alternatives, FAQs

Aditya Birla Sun Life Insurance Company Limited

What is Fixed Deposit?

A fixed deposit is an investment instrument that helps inventors earn interest on their deposited funds, over a set period of time. This investment avenue offers guaranteed³ returns, and is typically considered a ‘safe investment’ as it is not market-linked. Investors with both long-term and short-term goals can turn to FDs to fulfil their needs over time. In fact, most FDs have a minimum term period of 7 days and a maximum period of 10 years.

While the minimum amount an investor can put in an FD is ₹5,000, the maximum amount varies from bank to bank. Some banks allow an investment of ₹1 lakh while others allow an investment of ₹1.5 lakhs.

It is important to note that an FD, like many other investment options, locks the investor’s funds for a specific period of time, for example 10 years. However, this does not mean that investors cannot withdraw their funds at the time of an emergency. This easy-liquidation is one of the most beneficial features of FDs¹.

The interest rate offered by FDs is fixed, and can vary from bank to bank. In general, the interest rate can vary from 2.7% - 7.15%.

Let’s understand more about FDs with the help of an example.

Rekha invests ₹1,00,000 in an FD for 5 years, and is offered an interest rate of 5.5% per annum. At the end of 5 years, she will have ₹1,31,407.

Types of FDs

There are different types of FDs for investors to choose, based on their investment goals, tenure, and investment amount. These are:

Standard FD
Cumulative FD
Flexible FD
Tax-Saving FD
Non-Cumulative FD

Standard FD:

A Standard FD has an investment period of 7 days to 10 years. It offers a fixed interest over the term period.

Tax-Saving FD:

This type of FD is designed to help investors save up to ₹1.5 Lakh in their taxes, as per Section 80C of the Income Tax Act.

Cumulative FD:

A Cumulative FD offers compounded interest, and is a way for investors to grow their wealth significantly. The compounding happens on a yearly or quarterly basis.

Non-Cumulative FD:

This is a good option for investors who want a monthly pension, as the interest is paid out to the investor on a monthly, quarterly, or annual basis (based on their preference).

Flexible FD:

This type of FD shuffles the investment amount from the FD to the savings account. It is linked to the investor’s bank account. This can be beneficial during times when the interest rate fluctuates and the interest rate of the savings account works out to be higher.

How to calculate your FD’s growth with an FD Calculator?

Using an FD calculator is quite simple, and can be beneficial for investors who want to estimate the growth of their funds to plan their future. To use an FD calculator, you must:

Enter the applicable investment amount (example: ₹1 Lakh).

Enter the applicable interest rate offered by the bank.

Select the desired term period.

Click the calculate button to reveal the interest and total growth of the funds.

Factors Affecting FD Interest Rates from Banks

The interest rates offered by banks can vary from bank to bank, however, each year, there is a certain range within which the interest falls. This can be impacted by many factors, such as:

## Term Period: The interest rate offered to an investor can vary based on the selected term period. On a general note, longer term periods receive higher interests. In other words, an investor investing for 10 years will get a higher interest rate than an investor who is investing for 5 years.

## Renewals: Renewing an FD means agreeing to keep your funds in the bank for a longer duration. This always works out to be beneficial for banks, and so, to incentivise investors, they offer a higher interest rate when they opt for auto-renewals. Apart from this, auto-renewals have an added benefit: investors don’t have to worry about the renewal date.

## Age: The age of the investor plays a significant role in the interest rate offered by banks. Senior Citizens get a higher interest rate than investors below the age of 60.

The age of the investor plays a significant role in the interest rate offered by banks. Senior Citizens get a higher interest rate than investors below the age of 60.

## Amount Invested: The amount invested can also impact the interest rate offered by the bank. Some banks offer high interest rates for lower investment amounts, and vice versa.

## Economic Conditions: All financial instruments are impacted by the economic conditions of a nation. If the market is in recession, the interest rates for FDs will be on the lower side. On the other hand, if the market is booming, then banks may offer a high interest rate.

## RBI's Mandates: The Reserve Bank of India dictates the applicable range of interest rates each year for investors under 60 years, as well as senior citizens. Banks must follow the range determined and offer FD interests based on the same.

Fixed Deposit Interest Rates

Year	1-3 Years	5 Years	Above 5 Years
2016 - 2017	6.75% - 7.00%	6.50% - 6.90%	6.50% - 6.75%
2017 - 2018	6.40% - 6.75%	6.25% - 6.70%	6.25% - 6.75%
2018 - 2019	6.25% - 7.25%	6.25% - 7.25%	6.25% - 7.25%
2019 - 2020	5.00% - 6.20%	5.70% - 6.40%	5.70% - 6.40%
2020 - 2021	5.00% - 5.35%	5.25% - 5.35%	5.25% - 5.50%

As illustrated above , FD interest rates have seen a slight drop over the last 5 years. However, this has not diminished their popularity as they offer guaranteed³ returns and a sense of security and peace. However, investors looking for higher interest rates than this can have a look at other investment avenues as well. Remember, it is important not just to invest based on the interest rates, but also your investment goals.

Fixed Deposit Alternatives in India

Investors looking for similarly stable instruments can consider the following alternatives to FDs:

Debt Mutual Funds:

These are a type of mutual funds that pool investors’ funds in companies and government-led endeavours. These funds are a good option for investors who want to create an emergency fund. The typical investment period ranges from 1 to 3 years.

Liquid Funds:

These are a type of debt funds wherein the money is invested in fixed-income securities. For instance, treasury bills, certificates of deposit, commercial papers, and so on. These typically mature within 91 days and don’t have a lock-in period.

ULIPs:

Short for Unit Linked Insurance Plans, these offer the benefit of investment and insurance all in one. These not only grow your funds, but also offer a death benefit that goes towards keeping your family secure.

Endowment Plan:

An endowment plan is a type of life insurance product that offers a lump sum payment to the investor on maturity (or when the investor passes away).

Corporate Fixed Deposits:

Like a regular FD, Corporate Fixed Deposits require investors to invest their money for a fixed term, for a fixed interest. However, unlike regular FDs, this investment instrument is controlled by Non-Financial and Financial (but non-banking) companies in India.

Fixed Maturity Plans:

These are a type of mutual funds where the money is invested in the debt market. The plan matures after a specific term, as specified in the policy document. These are low-risk investment options.

Government Bonds:

This is a type of debt instrument that is offered by the Central and State Government of India to fund their projects. These are secure, low-risk investment options with varying tenure.

How to find the right FD?

With so many banking and non-banking financial companies offering FDs at good interest rates, it can be hard for investors to choose the right one. Do not simply choose a bank because you already have a savings account there. Evaluate the following factors for the best possible outcome:

### Choose the right bank: Banks offer varying interest rates, and it is important to choose a bank with an interest rate of over 5%. This is because a lower rate would yield insufficient growth, making it harder to meet your goals. - For investors choosing a Corporate FD, checking the CRISIL and ICRA ratings can give you a good indication of whether you are choosing companies that are likely to keep your funds safe. - Public sector vs Private Sector Banks: The year-on-year profits of Public Sector banks has historically been higher than Private Sector Banks<sup>2</sup>. As a result, investors with a very low risk tolerance should pick Public Sector Banks to ensure the safety of their funds. - Premature withdrawal clause: Understanding the premature withdrawal clause is critical, as some banks may leverage a penalty of withdrawing before the tenure is over. This penalty amount can vary from bank to bank. It is wise to choose a bank with the lowest penalty, so that the amount can be withdrawn during an emergency without any added financial pinch.

### Cumulative vs Non-Cumulative FDs: A cumulative FD offers compounding interest, giving investors the chance to grow their wealth significantly. A non-cumulative FD offers the option of periodic payouts as regular income. Understanding which suits your needs at the time of maturity can help you plan your future better.

### Senior Citizen Offers: The interest rate offered to senior citizens is generally higher than the interest rates offered to those under 60 years of age. However, banks also periodically run offers to attract senior citizens and inspire them to invest. If any offer is applicable when investors are looking into FDs, they should be considered.

### Loan Availability Against FD: If you have a lot of financial goals planned in life, you may require a loan at some point. Understanding whether your chosen bank gives out loans against FDs (and how much) is important for planning your future expenses.

### Terms of Deposit: The term period of an FD can range from 7 days to 10 years. Generally, it is up to the investor to decide the term, however, some banks may offer specific plans for specific periods as well. Considering them and weighing their pros and cons can help.

### Competitive Analysis: Investors who are not sure about how deeply each variation in interest rates can impact the maturity sum should use the FD Calculator to make a sound decision!

How to Maximise the Returns from FDs?

To maximise the returns from FDs, investors must:

Refrain from withdrawing before the term period is over. The fund will demonstrate its best growth by maturity.

Choose cumulative FDs as compounding interest can help you earn more.

Use the Calculator to compare interest rates and calculate the best FD for your needs.

Open FDs for your parents to get the higher interest rates applicable to senior citizens.

Submit forms 15g and 15h to prevent banks from deducting TDS. These need to be submitted right at the beginning of the fiscal year. It is important to speak to your bank to understand this further.

Frequently Asked Questions on Fixed Deposits

Yes, it is deducted as TDS. If the returns exceed Rs 40,000 per annum or Rs 50,000 per annum (for senior citizens), the TDS is applicable.

FDs and RDs (recurring deposits) are two different investment instruments. In an FD, an investor invests a set amount in the form of a one-time payment, for a set period of time. In an RD, the investor invests a set amount on a set period, for a set period. For instance, the investor puts ₹5000 on the 1st of every month for a period of 5 years.

For investors under 60 years of age, Rs 40,000 earned in interest is tax-free. For senior citizens, ₹50,000 is tax free.

The minimum amount an investor can put in an FD is Rs 5,000. The maximum amount varies from bank to bank - some allow an investment of ₹1 lakh while others allow an investment of ₹1.5 lakhs.

¹ https://rbidocs.rbi.org.in/rdocs/Publications/PDFs/67TFC7E3F7A27E6422282350DA4A5E590C6.PDF
² https://www.business-standard.com/article/opinion/good-show-by-private-banks-better-by-psbs-121082200801_1.html ³ Provided all due premiums are paid.
^{^}Scenario: Rs. 5,00,000 Single Premium (Exclusive of GST). Male, Age 35, Plan Option A, Policy Term : 10 years ABSLI Fixed Maturity Plan is a Non- Linked Non- Participating Individual Savings Life Insurance Plan (UIN: 109N135V01)
ADV/8/22-23/1086

Fixed Deposits