Question 1

What is Fixed Deposit (FD) and how does it work?

Accepted Answer

Fixed Deposit (FD) is a savings instrument where you deposit a lump sum with a bank or NBFC for a fixed period at a predetermined interest rate. The bank pays you interest on your deposit, which is compounded quarterly in most cases. At maturity, you receive your principal plus accumulated interest. FDs are considered very safe as they are not affected by market fluctuations.

Question 2

How is FD interest calculated?

Accepted Answer

FD interest is calculated using compound interest formula: A = P(1 + r/n)^(nt), where P = Principal, r = Annual interest rate, n = Compounding frequency (4 for quarterly), t = Time in years. For example, ₹1 lakh at 7% for 5 years with quarterly compounding = ₹1,00,000 × (1 + 0.07/4)^(4×5) = ₹1,41,478.

Question 3

What is the difference between simple and compound interest in FD?

Accepted Answer

Simple interest is calculated only on principal: SI = P × R × T / 100. Compound interest is calculated on principal plus accumulated interest. Most bank FDs use quarterly compounding, which gives higher returns than simple interest. For example, ₹1 lakh at 7% for 3 years: Simple Interest = ₹21,000, Compound Interest (quarterly) = ₹23,144.

Question 4

What is the minimum and maximum tenure for FD?

Accepted Answer

FD tenure varies by bank: Minimum is typically 7 days to 14 days, Maximum ranges from 10 years to 20 years. Most popular tenures are 1 year, 2 years, 3 years, and 5 years. For tax-saving FD under Section 80C, the mandatory lock-in period is 5 years.

Question 5

Are FD returns guaranteed?

Accepted Answer

Yes, FD returns are guaranteed at the rate fixed at the time of deposit. Unlike mutual funds or stocks, FD interest rates don't change with market conditions. However, if you break the FD prematurely, you may get a lower rate. Bank deposits up to ₹5 lakh are insured by DICGC (Deposit Insurance).

Question 6

What happens if I break my FD before maturity?

Accepted Answer

Premature withdrawal typically results in: (1) Lower interest rate – usually 0.5-1% less than the original rate, (2) Penalty of 0.5-1% may be charged by some banks, (3) Interest is recalculated at the lower rate for the actual period. Some banks offer penalty-free premature withdrawal on specific FD products.

Question 7

How is FD interest taxed in India?

Accepted Answer

FD interest is fully taxable as "Income from Other Sources" at your income tax slab rate. TDS is deducted at 10% if interest exceeds ₹40,000/year (₹50,000 for senior citizens). If PAN is not provided, TDS is 20%. You can submit Form 15G (or 15H for seniors) to avoid TDS if your total income is below taxable limit.

Question 8

What is a Tax-Saving FD?

Accepted Answer

Tax-Saving FD is a 5-year fixed deposit that qualifies for deduction under Section 80C up to ₹1.5 lakh per year. Key features: (1) Lock-in period of 5 years – no premature withdrawal allowed, (2) No loan against this FD, (3) Only the principal qualifies for 80C deduction – interest is still taxable.

Question 9

Do senior citizens get higher FD rates?

Accepted Answer

Yes, most banks offer 0.25% to 0.50% additional interest to senior citizens (60+ years). Some banks offer up to 0.75% extra for super senior citizens (80+ years). The higher TDS threshold of ₹50,000 also benefits seniors with larger deposits.

Question 10

Can I get a loan against my FD?

Accepted Answer

Yes, banks offer loans/overdraft against FD up to 90-95% of the deposit value at interest rates 1-2% above the FD rate. Benefits: (1) Quick processing, minimal documentation, (2) FD continues to earn interest, (3) Lower interest than personal loans, (4) No need to break FD. Not available for tax-saving FDs.

Question 11

What is cumulative vs non-cumulative FD?

Accepted Answer

Cumulative FD: Interest is compounded and paid at maturity along with principal. Best for wealth creation. Non-cumulative FD: Interest is paid out periodically (monthly/quarterly/yearly). Best for regular income, often chosen by retirees. Cumulative FDs give slightly higher effective returns due to compounding.

Question 12

Should I invest in FD or other instruments?

Accepted Answer

FD is ideal when you want: (1) Guaranteed, risk-free returns, (2) Capital preservation, (3) Short to medium-term goals (1-5 years). Consider other options for: (1) Long-term goals (10+ years) – equity mutual funds may give higher returns, (2) Inflation beating returns – debt funds, PPF, (3) Tax efficiency – ELSS, PPF have better tax treatment.

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