What is a Fixed Deposit (FD)?
A Fixed Deposit (FD) is a financial instrument provided by banks which provides investors with a higher rate of interest than a regular savings bank account, until the given maturity date. It may or may not require the creation of a separate account.
How is FD interest calculated?
FD interest is calculated using the compound interest formula: A = P(1 + r/n)^(nt), where A is the maturity amount, P is the principal amount, r is the annual interest rate (in decimal), n is the number of times interest is compounded per year, and t is the time in years.
What is the benefit of compounding in FDs?
Compounding in FDs means you earn interest on both the principal amount and the accumulated interest of previous periods. This leads to exponential growth of your investment over time, resulting in higher returns compared to simple interest.
How does compounding frequency affect FD returns?
Higher compounding frequency leads to higher returns. For example, monthly compounding will yield more than annual compounding for the same interest rate and time period because interest is calculated and added to the principal more frequently.
Are FD interests taxable?
Yes, the interest earned on FDs is taxable as per your income tax slab rate. Banks deduct TDS (Tax Deducted at Source) if the interest earned exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year.
Can I withdraw my FD before maturity?
Yes, you can withdraw your FD before maturity, but it usually attracts a penalty. The penalty amount varies from bank to bank, typically 0.5% to 1% of the principal amount. The interest is paid for the period the deposit remained with the bank.