Fixed Deposit (FD)

The fixed deposit is India's most trusted savings instrument. You park a lump sum for a fixed period, the rate is locked at the start, and your return does not depend on market swings. Predictability is the entire appeal.

How it works

You choose a tenure (typically 7 days to 10 years) and the bank pays a pre-agreed rate. You can take interest periodically (a non-cumulative FD, popular with retirees needing income) or let it compound and receive everything at maturity (a cumulative FD). Senior citizens usually get a small extra rate.

FDs with banks carry an important safety net: deposits are insured by the DICGC up to ₹5 lakh per depositor per bank, covering both principal and interest. Spreading large sums across banks keeps you within this cover.

In India

FD interest is fully taxable, added to your income and taxed at your slab rate. Banks deduct TDS once interest in a year crosses the prescribed threshold (higher for senior citizens); submit Form 15G or 15H if your total income is below the taxable limit to avoid this deduction.

A special 5-year tax-saving FD qualifies for a deduction under Section 80C of the old tax regime, but it comes with a strict lock-in and no premature withdrawal.

Why it matters

FDs are ideal for an emergency fund, short-term goals, and capital you cannot afford to lose. They are also the bedrock of a retiree's income. The catch is that after tax and inflation, the *real* return can be thin, so FDs are for safety and stability, not long-term wealth creation, which equity usually does better over long horizons.

Common mistakes

Breaking an FD early triggers a penalty, often around half a percent, and worse, interest is recalculated at the lower rate applicable for the actual period held. To soften this, ladder your deposits across several maturities so cash comes free at intervals without breaking everything. Also compare small finance bank rates (still DICGC-insured up to ₹5 lakh) against large banks, and never chase an unusually high rate from an unrated entity.