FD: What is a Fixed Deposit & How It Works

FD stands for Fixed Deposit. It is a safe investment where a person deposits a lump sum amount with a bank for a fixed time and earns interest on it.

Example:
Meena invested ₹1,00,000 in a Fixed Deposit for 3 years at 7% interest per year. She chose to receive the interest yearly. At the end of each year, the bank paid her a fixed interest amount. She didn’t withdraw the principal during this time.

Here’s how her FD worked:
 

At the end of 3 years, Meena got ₹21,000 as interest and ₹1,00,000 as her original amount back.

Why Do People Choose Fixed Deposits?

Fixed Deposits (FDs) are trusted by many people because they offer safety and steady returns. Here’s why FDs are a popular choice:

• Safe Investment: Banks offer FDs, and the money stays secure. There is very little risk of losing the capital.
   
• Guaranteed Returns: The interest rate is fixed when you open the FD, so you know exactly how much you will earn.
   
• Better Than Savings Accounts: FDs usually give a higher interest rate than normal savings accounts.
   
• Easy to Manage: You can choose how long you want to invest, and also how often you want to receive the interest.
   
• Tax Benefits: Some special FDs help you save tax under Section 80C of the Income Tax Act.
   

Overall, Fixed Deposits suit people who prefer simple and risk-free ways to grow their money.
 

For example, Dhruva and Siddharth both received ₹50,000 from a family gift. They decided to save it, but in different ways.
 

• Dhruva chose a Fixed Deposit (FD) for 1 year at 7% interest. He wanted to keep his money safe and earn more.
   
• Siddharth kept the money in a Savings Account with 3.5% interest, so he could take it out anytime.

Here’s what happened after 1 year:
 

Why Did Dhruva Choose FD?

• He wanted better returns than a savings account.
   
• He didn’t need the money immediately, so he could lock it for a year.
   
• He liked the idea of guaranteed and safe earnings.

This shows why many people choose FDs; they offer steady growth, safety, and peace of mind.

How Does a Fixed Deposit Work?

A Fixed Deposit (FD) is a simple way to save money and earn interest. You put in a certain amount of money for a fixed time and let it grow without touching it.

How it works:

• You choose how much money to deposit and for how long, from 7 days to 10 years.
   
• You cannot withdraw the money before the end of this time (called "maturity") without a penalty.
   
• The interest rate depends on the period and the amount you deposit. Longer time often means higher interest.
   
• You can decide whether you want the interest paid to your Savings Account regularly or reinvested in the FD.
   
• Most banks ask you to have a Savings Account to open an FD.

Key Features and Benefits of a Fixed Deposit (FD)

Fixed Deposits are a popular choice for safe and steady savings. The table below shows the main features and benefits in simple terms:
 

Fixed Deposits are ideal if you want safe, steady, and stress-free savings.

Types of Fixed Deposits 

Fixed Deposits (FDs) come in different types to match different financial needs. Here's a simple guide with short examples to help you understand them better.

1. Conventional FD

This is the most common type. You deposit a lump sum for a fixed time and get fixed interest. You can choose how often you receive the interest.

For example, Ravi deposits ₹50,000 in a conventional FD for 2 years at 7% interest. He chooses to receive interest every 3 months.

2. Tax-Saving FD

You can save tax under Section 80C by investing up to ₹1.5 lakh. These FDs have a 5-year lock-in period. No early withdrawal is allowed.

For example, Anita invests ₹1,50,000 in a tax-saving FD. She saves tax and earns fixed returns, but she can’t break the FD for 5 years.

3. Senior Citizen FD

This FD is for people aged 60 and above. It offers a higher interest rate.

For example, Mr. Sharma, aged 65, opens a senior citizen FD for ₹2,00,000. He gets 0.5% extra interest compared to a regular FD.

4. Cumulative FD

Here, the interest is added back into the FD. You get the full amount plus interest at the end.

For example, Neha invests ₹1,00,000 in a 3-year cumulative FD. She receives both the interest and the original amount only at the end of the tenure.

5. Non-Cumulative FD

Interest is paid out regularly, monthly, quarterly, or yearly, based on your choice.

For example, Siddharth wants a monthly income, so he invests ₹1,50,000 in a non-cumulative FD. He receives interest every month.
 

Why Choose FD ? ( for example, ICICI Bank)?

Fixed Deposits are a trusted way to grow your money safely. Banks like ICICI offer flexible features to meet different savings needs. You can earn good interest, choose how long to invest, and apply easily online. Here's what ICICI Bank offers:

Conclusion

A Fixed Deposit (FD) is a simple and safe way to save money. You lock in a certain amount for a fixed time and earn guaranteed interest. Banks offer flexible tenures, steady returns, and full safety of your money, making FDs ideal for stress-free savings.

FAQ’s
 

1. What is a Fixed Deposit (FD)?
An FD is a savings option where you deposit money for a set time and earn fixed interest.

2. Can I withdraw money before the FD matures?
Yes, but banks may charge a penalty for early withdrawal.

3. How much money do I need to open an FD?
You can open an FD with as little as ₹10,000 in most banks.

4. Do I need a Savings Account to open an FD?
Yes, most banks require you to have a Savings Account to open an FD.

5. Is the interest on FD taxable?
Yes, the interest earned on an FD is taxable and may have TDS applied.

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