What is Fixed Deposit?What is Recurring Deposit?What is EMI?Compounding and Discounting

What is Fixed Deposit?

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Fixed Deposit also known as FD is an investment instrument offered by banks.

You deposit a certain amount of money in a bank as a fixed deposit and earn a higher interest rate than a savings account.

"Interest earned on a fixed deposit account is taxable."

The time for which you can create a fixed deposit depends on the bank you are opening your FD account. Generally, it is between 7 days to 10 years.

Once you put your money in a fixed deposit account then, it is locked until maturity.

If you want to withdraw your money before maturity then, you have to pay a penalty amount which varies from bank to bank.

Points to note about fixed deposit account

  • You earn a higher interest rate than a savings account.
  • You can only put money once in a fixed deposit account.
    So, if you create a fixed deposit account with INR 10,000 and later decide to add INR 5,000 more to it then, you have to create a new fixed deposit account.
  • The interest you earn on a fixed deposit account is taxable. The bank will deduct tax, if applicable.

Benefits of fixed deposits

  • It is the safest investment.
  • A higher rate of interest which means higher returns than a savings account. Senior citizens get an even higher rate of interest.
  • Assured return on investment.
  • You can't lose the money you invest (Principal) in a fixed deposit account.
  • Fixed deposit is not affected by market fluctuations.
"Most banks in India calculate fixed deposit interest quarterly."

Let's take an example

Vijay is a 25-year-old man who opens a fixed deposit account with INR 100,000 (Indian Rupee One Lakh) for invests the money for 5 years. The bank is giving him 7.3% interest per annum compounded quarterly.

At the time of maturity (5 years later) he will receive INR 143,578.16 from the bank. So, he will earn INR 43,578.16 as interest in 5 years.

Check out this Fixed Deposit Calculator to calculate fixed deposit returns.

Interest year-wise

YearPrincipalInterestAmount
1₹100,000.00₹7,502.28₹107,502.28
2₹107,502.28₹8,065.12₹115,567.40
3₹115,567.40₹8,670.19₹124,237.59
4₹124,237.59₹9,320.65₹133,558.24
5₹133,558.24₹10,019.91₹143,578.16

Total Interest: ₹43,578.16

The interest is calculated using Compound Interest.

Formula:

We use the following formula to calculate compound interest compounded quarterly.

A = P ( 1 + R/400 )4n

Where,
P = Principal (the amount you invest)
R = Rate of interest per annum
n = Time in years
A = Amount

Compound Interest = A - P

Here is a quote from Albert Einstein on Compound Interest.

Compound interest is the 8th wonder of the world.

He who understands it, earns it... He who doesn't... pays it.

- Albert Einstein

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