What is a Fixed Deposit and How It Works
A Fixed Deposit (FD) is a financial instrument provided by banks and NBFCs, where you can deposit a lump sum amount for a fixed tenure at a predetermined interest rate. It is one of the safest investment options in India and is ideal for risk-averse investors seeking guaranteed returns.
How FD Interest is Calculated
The interest on an FD can be calculated using the compound interest formula:
A = P × (1 + r/n)n × t
Where:
- A = Maturity amount
- P = Principal amount invested
- r = Annual interest rate (in decimal)
- n = Number of times interest is compounded per year
- t = Time period in years
Types of Compounding Frequencies
Interest in fixed deposits can be compounded at various intervals, which affects the maturity amount:
- Annually: Compounded once a year
- Half-Yearly: Compounded twice a year
- Quarterly: Compounded four times a year
- Monthly: Compounded twelve times a year
Benefits of Using a Fixed Deposit Calculator
- Quick & Accurate: Instantly calculate your maturity amount without manual formulas.
- Compare Options: Try different interest rates and time periods to find the best return.
- Investment Planning: Helps you plan your savings and financial goals efficiently.
- Visual Insight: Understand how interest accumulates over time with visual charts.
Taxation on FD Interest
Interest earned on FDs is fully taxable under “Income from Other Sources.” If the interest exceeds ₹40,000 in a financial year (₹50,000 for senior citizens), TDS (Tax Deducted at Source) of 10% is applicable by the bank.
Important Notes
- Premature withdrawal may incur penalties or reduced interest rates.
- Senior citizens often enjoy higher interest rates on fixed deposits.
- Always compare interest rates from different banks before investing.
FD vs Other Investment Instruments
| Investment Option | Risk | Return | Liquidity |
|---|---|---|---|
| Fixed Deposit | Low | Moderate | Low (Penalty on early withdrawal) |
| Mutual Funds | Moderate to High | High (Market Linked) | High |
| PPF | Low | Moderate (Government backed) | Very Low (15-year lock-in) |
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