What is Fixed Deposit?
Money
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
| Year | Principal | Interest | Amount |
|---|---|---|---|
| 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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