What Are the Different Types of Fixed Deposits in India?
Ratan Palesha wanted to invest his money in a Fixed Deposit (FD). But, he had no idea about the different types of FDs available in the market. He wondered which would be the best kind of FD for him. Finally, he called his financial advisor. After much deliberation, he decided to go for a tax-saving FD.
Are you also confused about the many types of FD schemes available? Take a look at this article then. Find out about the different kinds of FDs and their features.
Callable Fixed Deposit:
This is the most basic kind of FD. It is quite uncomplicated. You lock in a sum of money for a term of your choice. The bank or Non-banking Financial Company (NBFC) gives you a fixed interest rate. Your dividend grows accordingly. You can withdraw or break the FD before its maturity date. But you have to pay a penalty in that case. You can also take a loan against a callable FD.
Non-Callable Fixed Deposit:
In this case, you have to invest a sum of Rs 15 lakh or more. But, you cannot break the FD before its maturity date. This is a good option if you like to save in a disciplined manner. Non-callable FDs are usually available for short tenures of one or two years only.
Cumulative Fixed Deposit
A cumulative FD is one in which the bank or NBFC pays out the dividend in a lump sum at the end of the FD’s term. The investor cannot withdraw the interest earned during the term. The financial company adds the interest to the principal from time to time and the fund continues to grow.
Non-Cumulative Fixed Deposit:
In this case, the principal continues to stay invested. But, the bank or NBFC disburses the interest at regular intervals to the investor. The dividend acts as a regular source of income. These FDs are ideal for retired people or those who need a secondary source of income.
Tax-Saving Fixed Deposit:
Next, we have the very beneficial tax-saving FDs. You have to book these FDs for at least five years. The principal is tax-deductible under Section 80C of the Indian Income Tax Act, 1961. But the interest you earn would be taxable.
Flexi Fixed Deposits:
This is a very interesting type of FD. Flexi FDs are linked to the investor’s bank account. The money keeps traveling between the bank account and the FD account. All this time, it earns the higher FD interest rate. You can understand this with an example. Rahul issued a cheque for Rs 75,000. He only had Rs 40,000 in his savings account. But the cheque did not bounce. The bank honored it and took the remaining sum out of his FD account. The rest of the money in his FD account remained invested and earned the high-interest rate. Certain types of Flexi fixed deposits would have allowed Rahul to put this extra money back into the FD. This happens through the ‘Sweep-in’ facility.
Which Fixed Deposit Should You Opt for?
As you can see, many types of FDs are available in India. All the FD schemes can fetch you their best possible returns. But, the different FDs meet different financial goals. So, you have to choose a scheme based on your needs. For instance, you often spend more than you wish. Then a non-callable FD could help; it could teach you financial discipline. Are you looking to save tax? Then the tax-saving FDs are tailor-made for you. Or are you a youngster repaying your student loan? A non-cumulative FD could be your best friend.
Additional Read : FD or PPF? What Is the Best Form of Investment for You?
The bottom line:
Different people have different needs. Financial experts have designed the different kinds of FDs keeping this in mind. So, go through the features and benefits of every type of FD. Select the scheme that would fetch you the highest returns on the best terms.