Fixed Deposit — the simplest, oldest savings instrument
A Fixed Deposit (FD) lets you deposit a lump sum with a bank or NBFC for a fixed term (7 days to 10 years) at a fixed interest rate. Unlike a savings account, the rate is locked in for the full term — making FDs a useful tool for short-to-medium-term goals with zero capital risk (up to ₹5 lakh per bank, insured by DICGC).
Simple vs compound interest
FDs come in two flavours. Cumulative FDs reinvest interest into principal at every compounding cycle (typically quarterly) — you receive principal + total interest at maturity. The formula is:
A = P × (1 + r/n)n·t
Non-cumulativeFDs pay out interest periodically (monthly, quarterly or annually) — useful for retirees needing income but less efficient overall, since you don't earn interest on interest. ₹1 lakh at 7% for 5 years compounded quarterly grows to ₹1,41,478; the same in simple-interest terms is only ₹1,35,000.
Tax on FD interest
FD interest is fully taxable at your slab rate — there is no LTCG-style preferential treatment. Banks deduct TDS at 10% if interest from a single bank exceeds ₹40,000 in a financial year (₹50,000 for senior citizens; raised to ₹1 lakh in Budget 2025). Submit Form 15G/H if your total income is below the basic exemption limit to avoid TDS.
Interest is taxable on accrual basis, not maturity — even if you opt for cumulative FD, you still need to declare the interest accrued each year. Banks issue a Form 16A showing TDS deducted for filing.
Tax-saving FDs (5-year)
FDs with a 5-year lock-in qualify for Section 80C deductionup to ₹1.5 lakh. Interest is still taxable, however — these are deduction-saving, not return- saving. Worth considering only if you've already filled non-FD options like ELSS, PPF and EPF.
Senior-citizen FDs
Most banks offer a 0.25–0.75% rate premium for citizens above 60. Combined with the higher TDS threshold, senior-citizen FDs are one of the most accessible income instruments for retirees. The Senior Citizens Savings Scheme (SCSS) is even more generous at ~8.2% — deserves a look alongside an FD ladder.
FD laddering — how to manage interest-rate risk
Locking ₹10 lakh into a single 5-year FD exposes you to the rate available today. Instead, ladder it: ₹2 lakh each into 1-, 2-, 3-, 4- and 5-year FDs. As each matures, reinvest into a fresh 5-year FD. This way you always have a maturing tranche if rates rise, and your average rate tracks the market over time.
FD vs Debt mutual fund
Debt mutual funds typically yield 0.5–1% more than comparable FDs net of expense ratio. Critically, post-Budget-2023, debt-fund gains are always taxed at slab rate (no LTCG indexation any more) — same as FD interest. So the choice is between FDs (DICGC insurance to ₹5 L per bank, fixed return, illiquid till maturity) and debt funds (no insurance, slightly higher return, daily liquidity). For 1–3 year horizons, debt funds usually win on convenience and slightly higher returns.