Important Things One Should Know Before Opening an FD Account

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When Soha, a single mother, was considering different investment options to invest INR 10 lakhs for her daughter’s higher education, she wanted a risk-free and flexible option to secure her hard-earned savings.        

During her research, she came to know about FD accounts and the fact that:

  • Despite market fluctuations or fluctuating interest rates, she can earn the promised fixed returns at maturity and
  • She can reinvest the sum for another term once the FD account matures

Now, Soha is convinced that she wants to invest her INR 10 lakhs in an FD account for 5 years to have a decent corpus when her daughter is done with her 12th grade and ready to pursue higher studies.

Like Soha, many people are interested in investing their hard-earned money but are scared of risky investment avenues. In this post, we will discuss the advantages of an FD and the points one should keep in mind while opening an FD account.

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What is a Fixed Deposit (FD)?

FD is an investment instrument banks and non-banking financial companies (NBFCs) offer. FD allows investors to invest a particular sum of money for a fixed period at a fixed rate of interest. However, the interest rate varies from bank to bank and is usually higher as compared to savings accounts. You can get an FD account for varying tenures, from 7 days to 10 years.

9 Important things to note before investing in an FD account 

1. FD account is simple to open:

Getting an FD account is simple, and an investor can open it with the bank holding their savings account. However, a person doesn’t need a savings account to get an FD. Many banks allow FD accounts even without savings accounts. All you must do is go through a KYC process, and you can open the FD even without your savings account.

Steps to get a KYC done:

    • Provide copies of self-attested ID proof like PAN, Voter ID Card, Passport, Aadhar Card, etc.
    • Passport-size photos (colored)
    • Show the original documents at the time of verification

2. Minimum Deposit:

Depending on the bank that you are planning to open your FD, you will have to decide the minimum and maximum limits of the deposit. For instance, public sector banks like SBI allow a minimum limit of INR 1000 as FD with no maximum limit, while it is different for ICICI, where INR 2000 is the minimum FD amount for minors and INR 10,000 for adults.

3. Tenure of FD:

The tenure of FDs ranges between 7-14 days to over 10 years. This tenure is fixed at the time of opening the FD account. An investor must check the tenure carefully per the FD’s purpose. If an FD is closed/withdrawn prematurely, it would levy a penalty on the investor.

4. FD Interest Rates:

The FD interest rate depends on the tenure of the FD as well as the bank where you have opened the FD account. Senior citizens generally receive a higher interest rate as compared to others.

5. FD Payouts:

FD payouts are given out in two ways – cumulative and non-cumulative. A non-cumulative FD is one where you can earn regular income for a regular period. Alternatively, a cumulative payout is when the accrued return is handed over at maturity. In such cases, the investor can reinvest the accrued interest amount.

6. Tax Exemption on FDs:

FD interest rates are completely taxable according to the Income Tax slabs. TDS is deducted as per IT laws if the interest earned is more than INR 10,000 in a financial year. To avoid deduction of TDS, the investor can submit form 15G or 15H to the bank.

7. Withdraw FD Prematurely:

Withdrawing the FD prematurely is possible in a financial emergency. However, you may note that the bank will levy a penalty on such withdrawals, which again differs from bank to bank. You can check the rules of pre-mature withdrawal at the time of opening your FD account.

8. Loan against FD:

The FD amount can also be used as a guarantee to avail of a loan. The loan amount, however, depends on the principal FD deposit, and it varies as per the financial institution that you get your FD from.

9. FD Nomination facility:

Your FD account permits you to nominate a person as your nominee so that if anything untoward happens to the FD account holder, the nominee can claim the amount.

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To Sum Up

Fixed deposits, or FDs, have been synonymous with investment for years. If an assured return with a safe option of investment is what you are looking at, consider an FD account for investment. If you plan to open an FD account, the guidelines above will serve you well.
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FAQs: 9 Important Things One Should Know Before Opening an Fixed Deposit Account

Can I withdraw money from my FD account before maturity?

Yes, you can withdraw your fixed deposit before the maturity period. However, remember that you might be levied with a penalty of 0.5% to 2%.

Can I open FD online?

Yes, you can open an FD account online with a bank or an NBFC.

What is 7 days FD?

7-day FD is a short-term FD scheme where you can invest your money in a fixed deposit account for 7 days.

Do bank FDs offer simple or compound interest?

Bank FDs provide interest income for 6 months and are generally calculated with simple interest. If the Fixed Deposit duration is more than 6 months, it is calculated in compound interest.

What is the maturity value in FD?

FD maturity value is the total amount the investor receives when the FD matures. This sum includes the principal amount invested as well as the interest earned.

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Sep 13, 2023
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