mughalg132What is Fixed Deposit in a Bank: Complete Guide Step by step
Fixed Deposits (FDs) stand out as a reliable option for those seeking a balance of simplicity and returns. In India, FDs are celebrated for their ease of initiation and the assurance of favourable returns. If you prioritise preserving your hard-earned money, aiming for financial goals with minimal risk, and cherishing assured returns, an FD becomes a compelling choice. Despite the widespread popularity of FDs, many people don’t know much about them. This article is your guide about FDs, ensuring you grasp every detail and make informed financial decisions. What is a Fixed Deposit? FDs are investment choices cherished by many in India. Their appeal lies in providing a secure, long-term investment avenue with low-risk returns. Unlike the unpredictable fluctuations of the stock market, FDs remain steadfast in preserving capital. Investment behaviours in India consistently favour FDs over equities, showcasing a preference for stability. A distinctive feature of FDs is the assurance of a predetermined interest rate, offering certainty to depositors. This pre-agreed capacity ensures the accumulation of interest without fail every year, providing a reliable stream of income. Notably, FDs remain insulated from the impact of government-induced changes in interest rates. This resilience contributes to the attractiveness of FDs as a financial instrument. In essence, FDs stand as a reliable, time-tested choice for those seeking security, predictability, and a steady growth of their invested capital. Types of FDs You can find several fixed deposits tailored to diverse financial goals. ●Tax Saving Fixed Deposit: With a lock-in period of five years, these deposits qualify for deductions under Section 80C of the Income Tax Act. Investors can claim deductions up to Rs. 1,50,000/- per annum, making it a tax-efficient choice. ●Money Multiplier: Linked to a savings account where the money is transferred back from the FD account to the savings account if the balance falls below Rs 10,000. ●Senior Citizen Fixed Deposit – Applicable to those over the age of 60. People who open these accounts get a higher interest rate, typically in the range of 0.5%. ●Cumulative Fixed Deposit: Adhering to Reserve Bank of India (RBI) directives, interest accrues at maturity, offering a compound benefit on both principal and interest components. It’s a rewarding choice for long-term wealth creation. ●Non-cumulative Fixed Deposit: This scheme ensures a consistent income stream as interest is not accumulated but paid at regular intervals. Options like monthly or quarterly payouts provide flexibility for meeting regular expenses. Eligibility for FD Account The eligibility to open an FD account is very simple. ●Individual Account: Individuals can open an FD account in their name. ●Joint Account: Flexibility extends to joint accounts, allowing more than one individual to open an FD account. ●Minor Accounts: Minors aged 10 and above can also benefit from FDs. Parents can act as guardians for these accounts. ●Institutional Accounts: Beyond individuals, clubs, associations, educational institutions, partnerships, and joint-stock companies can invest in FDs. The only stipulation is that they must be registered entities. FD interest calculation Banks use two methods to calculate interest on FDs: compound interest (CI) and simple interest (SI). For SI, the formula is straightforward: S.I. = (P×R×T)/100, where P is the principal amount, R is the rate of interest, and T is the time period in years. Take Mr. X, for example, who invested Rs 10,000 at 7.1% p.a. for 2 years. Applying the SI formula: Step 1: 10,000×7.1×2 = Rs 1,42,000 Step 2: 1,42,000 ÷ 100 = Rs 1420 Interest = Rs 1,420. Now, for CI, the formula is CI = P{(1+i/100)n -1}, where P is the principal amount, i is the rate of interest, and n is the number of years. […]