Fixed deposits (Indian banking)
Encyclopedia
Fixed deposits are a kind of high-interest-yielding deposit offered by banks in India, where bank accounts can be broadly categorised into 2 types :
The most popular form of Term deposits are Fixed Deposits. Other forms are Recurring Deposit
and Flexi Fixed Deposits
(the latter is actually a combination of Demand deposit and Fixed deposit).
As mentioned previously, to compensate for the low liquidity, FDs offer higher rates of interest than saving accounts. The longest permissible term for FDs is 10 years. Generally, the longer the term of deposit, higher is the rate of interest but a bank may offer lower rate of interest for a longer period if it expects interest rates, at which RBI lends to banks ("repo rates"), to dip in the future.
Ordinarily, interest on FDs is paid every three months from the date of the deposit. (e.g. if FD a/c was opened on 15th Feb., first interest instalment 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.
Instead, the customer can 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.
While banks can refuse to repay FDs before the expiry of the deposit, banks do not generally refuse premature withdrawal. In such cases, interest will be paid at the rate applicable to the term for which the deposit has remained with the bank. For example, a deposit is made for 5 years at 8 %, but is withdrawn after 2 years.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 per cent, the interest will be paid at 5 per cent. Banks can levy a penalty for premature withdrawal.
Customers can avail loans against FDs up to 80 to 90 per cent of the value of deposits. The rate of interest on the loan could be 1 to 2 per cent over the rate offered on the deposit.
In case the customer defaults in repaying the loan, the bank can adjust his FD against the loan.
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), that has to be surrendered to the bank at the time of renewal or encashment.
Generally, the customer has to give maturity instructions to the bank for the FD. In the absence of any instructions, the bank will give a benefit of 14 days from the date of maturity, to renew retrospectively. If the customer delays renewal for more than 14 days, renewal cannot be backdated.
Many banks now offer the facility of automatic renewal of FDs where the customers do not need to 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.
Banks issue Form 16 A every quarter to the customer, as a receipt for Tax Deducted at Source.
If one feels that the total income for the year will not fall within overall taxable limits, then he can submit Form 15 G, in case he is below 65 years of age, or Form 15 H, in case he is above 65 years of age.
State Bank Of India
- Demand deposits, which are repayable by the bank to the customer on demand-They offer high liquidity but correspondingly low or no interest. Includes the Savings Accounts and Current Accounts.
- Term deposits, which are repayable after expiry of the term, that is, on maturity. In return for the low liquidity (ease of withdrawing money), they offer higher rates of interest than the demand deposits.
The most popular form of Term deposits are Fixed Deposits. Other forms are Recurring Deposit
Recurring deposit
Recurring Deposits are a special kind of Term Deposits offered by banks in India which help people with regular incomes to deposit a fixed amount every month into their Recurring Deposit account and earn interest at the rate applicable to Fixed Deposits. It is similar to making FDs of a certain...
and Flexi Fixed Deposits
Flexi Fixed Deposits
Flexi Fixed Deposit is a special kind of deposit scheme offered by banks in India , which is a combination of Demand deposit and Fixed Deposits. The depositor is able to enjoy both the liquidity of Savings/Current accounts as well as the high returns of Fixed Deposits.- Mode of Working :The scheme...
(the latter is actually a combination of Demand deposit and Fixed deposit).
As mentioned previously, to compensate for the low liquidity, FDs offer higher rates of interest than saving accounts. The longest permissible term for FDs is 10 years. Generally, the longer the term of deposit, higher is the rate of interest but a bank may offer lower rate of interest for a longer period if it expects interest rates, at which RBI lends to banks ("repo rates"), to dip in the future.
Ordinarily, interest on FDs is paid every three months from the date of the deposit. (e.g. if FD a/c was opened on 15th Feb., first interest instalment 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.
Instead, the customer can 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.
While banks can refuse to repay FDs before the expiry of the deposit, banks do not generally refuse premature withdrawal. In such cases, interest will be paid at the rate applicable to the term for which the deposit has remained with the bank. 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 per cent, the interest will be paid at 5 per cent. Banks can levy a penalty for premature withdrawal.
Customers can avail loans against FDs up to 80 to 90 per cent of the value of deposits. The rate of interest on the loan could be 1 to 2 per cent over the rate offered on the deposit.
In case the customer defaults in repaying the loan, the bank can adjust his FD against the loan.
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), that has to be surrendered to the bank at the time of renewal or encashment.
Generally, the customer has to give maturity instructions to the bank for the FD. In the absence of any instructions, the bank will give a benefit of 14 days from the date of maturity, to renew retrospectively. If the customer delays renewal for more than 14 days, renewal cannot be backdated.
Many banks now offer the facility of automatic renewal of FDs where the customers do not need to 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.
Taxability
Tax is deducted by the banks on FDs if interest paid to a customer at any branch exceeds Rs 10,000 in a financial year. This is applicable to both interest payable or reinvested per customer or per branch. This is called Tax deducted at Source and is presently fixed at 10 % of the interest.Banks issue Form 16 A every quarter to the customer, as a receipt for Tax Deducted at Source.
If one feels that the total income for the year will not fall within overall taxable limits, then he can submit Form 15 G, in case he is below 65 years of age, or Form 15 H, in case he is above 65 years of age.
How bank FD rates of interest vary with RBI policy
In certain macroeconomic conditions (particularly during periods of high inflation) RBI 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.State Bank Of India