What Are The Types Of FDs, And Which One Should You Choose?

Fixed deposits (FDs) can be short- or long-term, ranging from 7 days to 10 years. All FDs come with fixed interest rates and are paid at regular intervals, like quarterly, half-yearly, or annually, depending on the tenure provided by the scheduled commercial banks, small finance banks or non-banking financial institutions (NBFCs). One can withdraw the principal amount or renew the FD at maturity. FDs are valuable tools to raise money for needs like children’s education, travelling, buying items, or meeting unexpected expenses. One can choose the FD type based on short- or long-term financial needs. FDs can be booked easily via Internet banking, mobile apps, or by visiting a bank branch. FDs can be of four types.

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Here are the details of the different types of FDs.

Tax-Savings FD

As the name suggests, tax-saving fixed deposit (FD) allows you to claim income tax exemption under Section 80C of the Income Tax Act, 1961, on investments up to Rs 1.5 lakh in a financial year. These FDs have a five-year lock-in. Also, premature withdrawals, loans, or overdraft facilities are not available. There is also no auto-renewal facility. Interest payouts are flexible, and interest rates remain unchanged over the complete period. These FDs can be held in single or joint mode. However, tax benefits are available only to the primary account holder in a joint FD.

Income tax exemptions under Section 80C can also be claimed for equity-linked savings scheme (ELSS) and public provident fund (PPF). Tax-saving FDs require a minimum investment of Rs 500, while ELSS has a three-year lock-in with minimal risk. PPF accounts require a minimum investment of Rs 500 with a 15-year lock-in. Both ELSS and PPF have advantages and risks.

Senior Citizen FD

A senior citizen fixed deposit (FD) scheme is a term deposit plan providing higher interest rates to individuals over 60 to enable them to manage living expenses after retiring from active work. These deposits offer a reliable incomesource, with tenures ranging from 7 days to 10 years. These FDs allow premature withdrawals, or they can be used as collateral for loans. FDs also offer flexible interest payout options and can be renewed at maturity. These deposits are a valuable tool for senior citizens to manage their financial needs.

Standard Bank FD

A standard bank FD allows you to deposit a fixed amount for a specific period, typically between 7 days and 10 years. The interest rate is fixed and is paid periodically, like quarterly, half-yearly, or annually. The principal amount is returned at maturity. These FDs also offer higher interest rates than bank savings accounts while providing safety, flexibility, and liquidity.

The interest rates can vary depending on the lender. The small finance banks and the non-banking financial institutions (NBFCs) typically offering highest rates than banks. All financial institutions offer 25-50 basis points higher interest rates to seniors than the general public.

Corporate FD

Corporate FDs are term deposits offered by non-banking financial companies, housing finance companies, and corporates. They are similar to traditional bank FDs but offer higher interest rates, depending on the issuer's credit rating, deposit amount, tenure, and market conditions. Corporate FDs are not insured by any agency,so carry a higher default risk than bank FDs. Credit rating agencies like ICRA and CRISIL use a 14-point rating system to assess the stability of a company FD.

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