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What Is Fixed Deposit Interest Rates: How Do They Work?

Fixed Deposits are a secure and reliable investment option, ideally suited for those prioritising 
safety and seeking steady returns without taking significant risks. 
 
Interest earnings on your FD accounts depend on the rates provided by financial institutions, 
typically ranging from 3% to 8%. As the interest rate increases, and with a prolonged investment 
duration, your cumulative returns and investment pool grow substantially. 
 
However, uncertainty often surrounds the mechanics of interest rates and the calculation of 
earned interest. Additionally, intricacies related to TDS on FD interest and the enhanced 
benefits available to senior citizens through tax-saving FDs can add complexity. 
 

The Economics Behind High-Interest Rates on Fixed Deposit  

Banks and other financial institutions use Fixed Deposits to raise funds. When individuals 
deposit their money in a Fixed Deposit account, the bank lends it to borrowers through loans, 
overdrafts, or credit. 
 
On lending, they charge interest from the borrowers, which is an earning. This means they are 
parking your funds and, in return, offering you a lucrative interest rate. 
 
The same also applies to savings accounts and recurring deposits. However, savings accounts 
offer a meagre percentage of interest because investors have the leverage to deposit/withdraw 
from such accounts without any restrictions. 
 
Recurring deposits are short-term deposits. Thus, the best way to maximise your returns is to 
invest in Fixed Deposits with a compounded interest attached to your principal amount. 
 

How is a Fixed Deposit Interest Rate Calculated? 

You can invest a lump sum as a Fixed Deposit for a fixed number of years and earn interest. 
The tenure ranges between 7 days to 10 years, and the interest rate depends on the financial 
institution. 
 
When your Fixed Deposit reaches its maturity date, you’ll receive back the original amount you 
deposited and the accrued interest. However, keep in mind that this interest is subject to 
taxation. 
 
In this regard, you can use an FD interest calculator to assess the estimated amount of interest 
earned on your investment. 
 
Let’s take a look at how it works: 
Enter the following values on the digital tool: 
P = The investment amount 
R = The rate of interest offered by the financial institution 
N = Investment tenure 
T = Number of times the interest is compounded per period 
 
The formula used for calculating interest: 
A= P(1+ r/n) ^nt 
 
So, for example, if you invest Rs 5 Lakh for 5 years at an interest rate of 7%, the interest 
amount you can earn is Rs 1,90,210, and the amount you will receive upon maturity would be 
approximately Rs 6,90,210. 
 

TDS on FD Interest 

Investing in tax-saving FDs can benefit you from tax exemptions up to Rs 1.50 Lakh under 
section 80C of the Income Tax Act, 1961. The overall tax on FD is calculated according to the 
income tax slab for a particular financial year. 
 
If you earn an interest amount on FD of more than Rs 40,000, you are liable to pay 10% as tax. 
This rate increased to 20% as tax on interest earned for people without PAN details. This 
amount is deducted as TDS (tax deducted at source) by the financial institution at the time of 
credit, explaining the TDS on FD interest. 

Fixed Deposit Benefits to Senior Citizens 

Financial institutions often provide preferential interest rates to senior citizens, recognising their 
limited income sources post-retirement. This means that compared to regular depositors, senior 
citizens can earn more on their Fixed Deposits. 
 
FD investments generally come with a 0.5% – 0.10% higher rate of interest offer, and they even 
have a chance to get a better deal on tax-saving FD interest rates. They can submit form 15H to 
the financial institution to save on TDS and avoid the hassle of filing ITR returns. 
 
Also, if their annual income exceeds Rs 2,50,000, they can claim a tax deduction of up to Rs 1.5 
Lakh under Section 80C of the Income Tax Act, 1961. They can also claim a tax deduction of up 
to Rs 50,000 on the interest earned on tax-saving FDs under section 80TTB of the Income Tax 
Act. 
 

Key Features of Fixed Deposits 

Here are some key features and reasons that emphasise the importance of investing in Fixed 
Deposits: 
 
Diversified Portfolio 
The biggest advantage is that Fixed Deposits provide diversification to your investment portfolio. 
While equities and mutual funds bring the potential for higher returns, they also come with 
higher volatility. FDs, being a risk-free instrument, balance out the portfolio, ensuring a portion of 
your investments is always safe. 
 
Unwavering Interest Earnings 
One of the biggest advantages is that the interest rate, in this regard, is not influenced by 
wavering or challenging external or market factors and remains fixed throughout the tenure. 
Fixed Deposit accounts follow the criteria of minimum deposit terms and minimum deposit 
amount; however, withdrawing funds before the end of the term may come with a penalty on the 
interest amount. 
 
Advantage of Digitalisation 
You can open your FD account online by submitting your basic information and depositing the 
invested amount in the financial institution. You can view your transactions and changes in 
interest amount earned through an app accessible 24/7 on your smartphone. 
 
Also, you can use the FD interest calculator, which helps you ascertain the amount you can 
earn as interest on your FD investments. This is an essential tool that enhances transparency 
and enables proactive financial planning. 
 
Tax Savings 
You can invest in a tax-saving FD and save tax on up to Rs 1.50 Lakh of your total interest 
earnings each year. You need to invest your idle funds to generate high returns and expand 
your investment portfolio through tax-saving FDs that offer more returns than savings accounts 
and are tailor-made to meet your investment needs.  
 
Different Types 
There are several types of accounts you can invest in. For instance, cumulative FDs reinvest 
the interest into the principal, resulting in compound interest, whereas non-cumulative FDs pay 
out interest at regular intervals, providing a consistent income stream. 
  
The advantages of FDs are also extended to NRIs. Thus, you can make sound investments in 
an FD account according to your financial needs and convenience. 
 
Conclusion 
You can fulfil your long-term financial investment needs by investing in Fixed Deposits, as they 
offer high interest rates, flexible tenures, a risk-free guarantee of assured returns, and diversity 
in your financial portfolio. 
 
When opening a Fixed Deposit account, the TDS (Tax Deducted at Source) on FD interest is an 
important consideration. TDS is a mandatory deduction by the government on the interest 
earned from Fixed Deposits, and it varies based on your overall taxable income. Understanding 
how TDS works and its impact on your returns is essential.  
 
Within seconds, you can open and operate your Fixed Deposit account online, taking TDS on 
FD interest into account and entering the world of lucrative investments. This way, you can 
optimise your savings, watch your money grow, and secure your financial future while complying 
with tax regulations. 

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