As per the data from RBI, there are 24.23 million fixed deposits in India, and they are worth over INR 103 trillion—a figure even higher than the total corpus of money kept in savings accounts, which stands at INR 59.7 trillion, and the current accounts, which amount to INR 18.5 trillion. Fixed deposits (FDs) are one of the most reliable investment avenues in India since they provide assured and fixed returns without the tension of market fluctuations.
However, FDs require a minimum investment period for a financial institution (usually your bank) to give out its returns, and this may differ based on the type of FD being made. Thus, in order to extract the best possible gains from your investments, it is prudent that you plan your investments very judiciously and pour your hard-earned money into the type of FD that best suits your financial goals. In this blog, we will discuss the various FD options and possible variations in their minimum investment periods.
Minimum Period for a Fixed Deposit
The minimum term for an FD is the shortest period for which you can keep your money invested. As discussed, it varies depending on the FD type and terms provided by your preferred small finance bank or NBFC.
While regular FDs could offer tenures of 7 days to 10 years, special FDs meant for tax-saving purposes usually come with a lock-in period of 5 years. Certain banks offer flexible FDs, in which the lock-in period is much shorter, and the customers are allowed to withdraw it prematurely with the condition of a penalty.
You should clearly check the terms and conditions defined by your bank or financial institution before putting your money in the FD. This ensures you are aware of any penalties or limitations related to early withdrawals.
What are the different types of fixed deposit investments?
Contrary to popular knowledge, there are many types of fixed deposits in India in which the minimum period of FD varies. Let us take an overview of that.
Standard Fixed Deposits
Most banks and financial institutions offer standard fixed deposit accounts, where a person can deposit money in a lump sum for a fixed tenure at certain interest rates provided by the bank. On maturity of the fixed deposit tenure, one receives the invested amounts along with the accrued interests.
The tenures for standard fixed deposits range between 7 days to 10 years.
Tax-Saving Fixed Deposits
These fixed deposits look to provide a tax benefit of 1.5 lakhs every year under section 80C of the Income Tax Act 1961. If tax-saving interests you more than the return from the fixed deposits, then this is recommendable. One of the features of this deposit is a lock-in period of 5 years. Though the lock-in period in itself might look like some kind of a constraint, there is a benefit to pushing yourself towards disciplined saving and interest income, as it does not allow you to break the deposit before 5 years.
Senior Citizen Fixed Deposits
As the name suggests, these fixed deposits are designed for senior citizens and retirees aged 60 years and above.
Generally, FD interest rates for Senior Citizens are 0.5% more than any regular fixed deposit account, while in some banks, it varies. The tenure of this FD investment goes from 7 days to 10 years.
Cumulative Fixed Deposits
Interest rates of cumulative fixed deposits are somewhat like those of standard deposits, but the interest accruing is added up at regular intervals to the principal amount. The cumulative fixed deposits have compounding interests and, therefore, are suitable for long-term investments. The tenure will be similar to that of a standard fixed deposit.
If you invest ₹1,00,000 in a cumulative fixed deposit at 6% interest for 5 years, instead of receiving interest payouts, the interest is added to the principal each year. At the end of 5 years, you would receive approximately ₹1,34,685 due to compounding, compared to ₹1,30,000 from a standard fixed deposit with annual interest payouts.
Non-Cumulative Fixed Deposits
On the other hand, for non-cumulative deposits, the interest is paid out from time to time. These kinds of deposits attract interest payouts at your convenience on a monthly, quarterly, half-yearly, or yearly basis. A non-cumulative fixed deposit is for people who require a regular source of income to pay their bills or EMI amounts. Generally, these FDs have an investment tenure ranging between six months to five years.
Flexi-Fixed Deposits
Also known as sweep-in fixed deposits, these accounts combine the benefits of savings accounts and fixed deposits by offering liquidity and higher interest rates. Your money stays safe in your savings account and can be withdrawn when needed. The bank deposits any surplus savings into the fixed deposit. The tenure can vary up to 10 years, depending on the bank’s conditions.
NRI Deposit Accounts
NRIs get to open a deposit account just like the regular citizens if they own an NRO or NRI account in an Indian bank. The interest rates in these accounts differ from bank to bank and their tenure is generally the same as that for a standard deposit account.
Conclusion
While FDs are a safe bet for investments, one needs to remain careful about the difference in minimum tenure among various types of FDs. Understanding the investment period and consequences of regular, tax-saving, or senior citizen FDs helps you make informed decisions for better financial planning. At this point, choose the type of FD and tenure that best suits your needs for maximum long-term returns by assessing your investment horizon, risk appetite, and tax planning needs.
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