What is an FD? Learn About Fixed Deposits, their Interest Rates, & Benefits

A Fixed Deposit (FD) is one of the most popular investment options in India. It is a low-risk investment option that offers a fixed interest rate. In fixed deposits, you can invest your money and earn returns on a fixed interest rate based on a fixed time period. You can now invest in high interest FDs through the smallcase app! In this blog, we will discuss FDs, their benefits, types, factors to consider before investing in them and how to book an FD on smallcase.

What are Fixed Deposits? 

A fixed deposit is a financial instrument where an investor deposits a lump sum amount of money for a fixed period of time with a financial institution like a bank or a non-banking financial company (NBFC). 

The deposited money earns a fixed interest rate that is higher than a regular savings account. The fixed deposit interest rate remains the same throughout the term of the deposit. At maturity, the investor gets back the principal amount along with the interest earned. Sometimes banks may offer special interest rates for senior citizen FDs. 

Key Features of Fixed Deposits

In the preceding section, we explored various types of fixed deposits. Now, let’s delve into essential features for a clear grasp of what a fixed deposit entails and whether it aligns with your needs:

• Single Deposit: You can deposit funds only once; for additional deposits, initiate a new Fixed Deposit.
• Competitive Interest: Offers a higher interest rate compared to savings accounts.
• Flexible Duration: Ranging from 7 days to 10 years, providing diverse investment durations.
• Easy Renewal: Hassle-free renewal options for existing fixed deposits.
• Maturity Restrictions: Withdrawals are restricted until the maturity period. Emergency withdrawals incur penalties for the account holder.

Introducing Fixed Deposits on smallcase!

High-interest fixed deposits (FDs) from RBI-regulated banks are now available on the smallcase app. These FDs offer stable returns and help diversify your investments. As fixed deposits are not subject to market risks, this can reduce your exposure to market volatility. Banks on smallcase provide some of the highest interest rates as the partner banks use quarterly compounding to boost their FD interest rates. All FDs on the platform are regulated by the RBI and insured by DICGC, covering amounts up to Rs. 5 lakh per bank. The entire process, from booking to withdrawal, is managed digitally. This makes it a smooth, paperless experience that allows you to invest in an FD in just 10 minutes!

How to Book an FD on smallcase?

Here is how interested candidates can book an FD on smallcase:

• Select a Bank: Interested candidates can compare the best FD rates in India from various partner banks and select one.
• Choose a Scheme: Then, they can pick an FD scheme based on the tenure—short-term, medium-term, or long-term. 
• Verify Your Identity: One would then need to digitally verify their PAN and Aadhaar.
• Complete Additional KYC: Provide any necessary additional KYC details, such as address, personal/professional information, and nominee selections.
• Make Payment: You can then pay for your FD using net banking or UPI.
• Video KYC (if required): Some banks may require an additional video KYC based on the deposit amount.

You can learn more about smallcase fixed deposits here.

What are the Available Banks for Fixed Deposits on smallcase?

The banks available on smallcase for FDs are:

1. Shivalik Bank
2. Suryoday Small Finance Bank (SFB)
3. Utkarsh Small Finance Bank

Payment Modes and Limits for Booking FDs on smallcase

Here are the payment modes and limits for booking your FDs on smallcase, based on the specific partner bank:

Shivalik Bank

• Minimum FD Investment Amount: Rs. 1,000
• Maximum FD Investment Amount: Rs. 10,00,000
• Payment Modes Available: UPI & Net Banking

Suryoday Small Finance Bank (SFB)

• Minimum FD Investment Amount: Rs. 1,000
• Maximum FD Investment Amount: Rs. 10,00,000
• Payment Modes Available: UPI & Net Banking

Utkarsh Small Finance Bank

• Minimum FD Investment Amount: Rs. 1,000
• Maximum FD Investment Amount: Rs. 10,80,000
• Payment Modes Available: UPI only.

Types of Fixed Deposits Available on smallcase

Here are the two types of FDs available on smallcase:

• Cumulative FDs: smallcase offers Fixed Deposits (FDs) with interest compounded quarterly. In cumulative FDs, interest accumulates with the principal and is paid out at maturity. 
• Senior Citizen FDs: Regular FD schemes provide higher interest rates for senior citizens, with premiums ranging from 0.2% to 0.7%, depending on the bank and scheme.

Benefits of Going for Fixed Deposits on smallcase

Here are a few reasons why one might consider smallcase for their fixed deposits:

• High Interest Bank FDs: Banks on smallcase offer some of the best FD rates for senior citizens and otherwise. This can ensure competitive returns on your investments.
• Insured Investment up to Rs. 5 Lakh: All FDs on smallcase are regulated by the RBI and insured by DICGC. This covers FD amounts up to Rs. 5 lakh per bank.
• Seamless Digital Process: Every step is conducted digitally at smallcase from booking to withdrawal. This eliminates the need for paperwork or bank visits.

How is the Interest Amount Calculated for smallcase FDs?

Since smallcase’s cumulative fixed deposits compound quarterly, interest is calculated every three months and added to the principal. This new total then earns interest in the next period. Here is the formula that is used to calculate this interest amount:

A=P(1+r/n)^nt

Here, 

• A: Maturity amount
• P: Principal amount
• r: Annual interest rate
• n: The number of times interest is compounded per year (for quarterly, n=4) 
• t: Tenure in years

Tax Implications on Fixed Deposits on smallcase

In India, fixed deposit (FD) interest is taxable under the Income Tax Act of 1961 as “income from other sources” and is included in your annual income. The tax rate applied depends on your total income.

TDS Exemption Limits

Banks deduct Tax Deducted at Source (TDS) on FD interest each year. The exemption limits are:

• General: Rs. 40,000 per year.
• Senior citizens (60+ years): Rs. 50,000 per year.
• Lower Income Bracket: No tax is due, and no TDS will be deducted, if your total income is less than Rs. 2,50,000.

If your interest income exceeds these limits, the bank will deduct TDS. If it’s below these limits, no TDS will be deducted. TDS is not your total tax liability; the final amount of tax you owe depends on your total income and tax bracket. You may need to pay extra tax if you fall into a higher bracket, or you might receive a refund if you are in a lower bracket. 

TDS Rates Based on Income

For interest earnings above Rs. 40,000 in a financial year, TDS rates are:

• 10% for PAN holders.
• 20% for non-PAN holders.

For example, if you earn Rs. 50,000 in interest:

• With PAN: The bank deducts Rs. 1,000 (10% of Rs. 10,000, the excess over Rs. 40,000).
• Without PAN: The bank deducts Rs. 2,000 (20% of Rs. 10,000).

Forms Related to TDS

• Form 15G: To avoid TDS deduction, submit Form 15G (for individuals under 60) or Form 15H (for senior citizens) at the start of the financial year. 
• Form 26AS: Form 26AS, available on the Income Tax Department’s website, shows the TDS deducted by the bank.

At FD maturity, you receive the principal amount plus net interest after TDS. When filing your tax return, you can report the interest income and claim credit for the TDS deducted. You can learn more about the taxation on smallcase FDs here.

How to Compare the Interest Payout of the Different FD schemes on smallcase?

Fixed deposits (FDs) can provide better returns when interest is compounded regularly instead of being paid at maturity. The return depends on how often interest is compounded: quarterly, semi-annually, or annually. Typically, FDs with quarterly compounding give higher returns than those compounded semi-annually or annually. Currently, smallcase only offers FDs with quarterly compounding. Below is a comparison of quarterly and annual compounding:

Case 1: Quarterly Compounding

John invests Rs. 30,000 in a cumulative FD with quarterly compounding at an annual interest rate of 6%. The interest compounds every three months.

Year 1:

• Quarter 1:
  • Principal: Rs. 30,000
  • Interest: Rs. 30,000 * (6% / 4) = Rs. 450
  • New Principal: Rs. 30,000 + Rs. 450 = Rs. 30,450
• Quarter 2:
  • Principal: Rs. 30,450
  • Interest: Rs. 30,450 * (6% / 4) = Rs. 456.75
  • New Principal: Rs. 30,450 + Rs. 456.75 = Rs. 30,906.75
• Quarter 3:
  • Principal: Rs. 30,906.75
  • Interest: Rs. 30,906.75 * (6% / 4) = Rs. 463.60
  • New Principal: Rs. 30,906.75 + Rs. 463.60 = Rs. 31,370.35
• Quarter 4:
  • Principal: Rs. 31,370.35
  • Interest: Rs. 31,370.35 * (6% / 4) = Rs. 470.56
  • New Principal: Rs. 31,370.35 + Rs. 470.56 = Rs. 31,840.91

Year 2:

• Follow the same calculation method for each quarter using the new principal.
• By the end of Year 2, the principal will be approximately Rs. 33,775.27.

Year 3:

• Continue the quarterly compounding process.
• By the end of Year 3, the FD will mature to Rs. 35,947.

Case 2: Annual Compounding

John invests Rs. 30,000 in a cumulative FD with annual compounding at the same interest rate of 6%. The interest compounds once a year.

Year 1:

• Principal: Rs. 30,000
• Interest: Rs. 30,000 * 6% = Rs. 1,800
• New Principal: Rs. 30,000 + Rs. 1,800 = Rs. 31,800

Year 2:

• Principal: Rs. 31,800
• Interest: Rs. 31,800 * 6% = Rs. 1,908
• New Principal: Rs. 31,800 + Rs. 1,908 = Rs. 33,708

Year 3:

• Principal: Rs. 33,708
• Interest: Rs. 33,708 * 6% = Rs. 2,022
• New Principal: Rs. 33,708 + Rs. 2,022 = Rs. 35,730

Quarterly compounding provides a higher maturity value than annual compounding because interest is calculated more frequently. This leads to greater overall returns. When comparing fixed deposit (FD) schemes with the same term, investment amount, and interest rate, those with more frequent compounding offer a better annualised yield, as seen in the comparison above. Thus, FDs that compound quarterly typically generate more interest than those that compound semi-annually or annually.

What Does Loan Against Fixed Deposits Mean?

Pledging your fixed deposit (FD) as collateral enables you to secure a loan, with the bank providing funds in return. Failure to repay prompts the bank to retrieve the loan amount from the FD. Interest on the loan is minimal, typically ranging from 75% to 95% of the FD value, varying among banks.

This loan is accessible to all FD holders at banks offering loans against FDs, excluding minors. Notably, it features lower interest rates, no prepayment penalties, and minimal processing charges due to the loan being processed against a collateral. 

Factors to Consider Before Investing in an FD (Fixed Deposit)

Before investing in fixed deposits (FDs), there are several factors to consider, including:

• Inflation: Inflation is the rate at which the cost of living increases. If the inflation rate is higher than the FD rates, the real rate of return will be negative, meaning the value of your investment will decrease in real terms.
• Tax rates: The interest earned on FDs is taxable as per the income tax slab of the investor. Therefore, investors should consider the tax rates while investing in FDs.
• Interest rates: The FD interest rates vary depending on the duration of the investment. Longer investment tenures tend to offer higher interest rates. Therefore, investors should consider the interest rates before investing in FDs.
• Investment tenure: FDs come with a fixed tenure, and withdrawing the investment before maturity may result in a penalty. Therefore, investors should consider the investment tenure before investing in FDs.
• Investment amount: FDs have a minimum investment amount, and investors should consider their financial goals and investment amount before investing in FDs.

To Wrap It Up…

Fixed deposits can be a way for risk averse investors to earn returns on their investment at a fixed rate. The high interest fixed deposits available on smallcase can be an attractive option of those seeking safe and assured returns on their investments. You can explore the different banks available on smallcase for FDs here. Banks available on smallcase compound their FD interests quarterly, resulting in higher FD rates. Investors can explore more about how to choose the best FDs here.

Frequently Asked Questions About Fixed Deposits

All About Saving Schemes – 

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