A Fixed Deposit is a money Investment Instrument and It is provided by the Banks, Post offices ( In India ), and NBFCs. It pays a higher return on Investment from the normal savings. People don’t know how does Fixed Deposit work? People should know.
The Fixed Deposit is a risk-free investment. while FDs are also giving higher returns on the investment from the Saving account and current account.
In this article, We will see how does the Fixed Deposit work and how we get interested in the FDs. I will try to give all the question answer in this article related to “how does Fixed Deposit work“
How does Fixed Deposit work with Example?
The working of FDs can be easily understood. It is considered a low-risk high returns investment. Let’s know how does Fixed deposit works.
Suppose, I have made an FD of 1,00,000 rupees ( $ 1360 ) and choose a period of 2 years ( I have an option to choose from 7 days to 10 years ). Bank has a mansion that you will get 8.5% interest per year if you invest money for 2 years.
After making FD, The Bank gives that fund to the people who requested loans. Person x decided to take a loan of the 1 lack ( $ 1360). The Bank decided to give a loan to the person x at 12% interest per year. It has taken a loan.
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After 2 years, person X return the amount to the Bank with interest on the capital. It has paid 24% interest on the amount. and on other hand, Bank has given interest to us after the mature FD. The interest in the capital we got is 17%.
This means the bank has taken 7% fees. The Bank has also earned money in this process. Person X has done work and We got interested in the capital.
I hope you have understood the process that How does the Fixed Deposit work. I have one advice for you, If you have money in the savings account or current account then do FD of it.
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Benefits of saving money in Fixed deposit
Here are the benefits of investing money in the Fixed Deposit. This will help you while investing. Let’s start.
The returns on investment are fixed in the FDs. The returns are mansion in the form. You can see that while filling the form. It can be around 7% to 8% per am, It depends on the period you invest and on Institute you selected.
No risk on Investment
FDs are comes in risk-free investments. Unlike other investment tools, FDs are not market-driven. You get an assured sum of money at the end of the maturity period. That’s the reason, This is an attractive investment for risk-averse investors.
Tax-saver FD attracts tax benefits under section 80C of the Income Tax Act, 1961. It falls under the Exempt-Tax-Exempt category. Although the interest earned on such FDs is taxable, you can claim a deduction of a maximum of Rs. 1,50,000 for the amount invested.
The FDs save from paying tax and In some countries, a small amount of tax is taken. But, Overall It saves our money.
Flexibility in Deposit period
The FDs give better returns for the best period. You can choose your time period of investment. The period can be 6 months, 12 months, 15 months, 3 years, 5 years, and 10 years, It totally depends on you.
Flexibility in withdrawal
We can withdraw our money anytime, But we withdraw FDs before mature then We have to pay a penalty. The loss of interest becomes the penalty that you pay for a premature withdrawal.
For example, An FD of Rs. 1,00,000 invested for 5 years at 8% interest rate, if withdrawn after a year, We will get interested at the rate applicable at that time, which will be lesser than 8%. The loss of interest becomes the penalty that you pay for a premature withdrawal.
If you want to know more advantages of fixed Deposit then you can visit the advantages of Fixed Deposit.
Frequently asked questions
Is Fixed Deposit paid Interest monthly?
The Bank, Interest paid on a monthly or quarterly basis. It totally depends on you that when you have to get the interest. While You should mansion in the form while filling the FDs form.
Can you lose money in Fixed Deposit?
The Fixed Deposit is known as a risk-free investment. The best thing to save money in FDs is you can’t lose your money. Because Unlike other investment tools, FDs are not market-driven. You get an assured sum of money at the end of the maturity period. That’s the reason, This is an attractive investment for risk-averse investors.
Is Fixed Deposit is a good option for Investment?
FDs can be a good option for investment for you. If you save money in the savings account or current then Fixed Deposit is the best option to save your money and get interest paid monthly or quarterly. FD is one of the safest and higher return paying investment.
How does Fixed Deposit interest is calculated?
The Fixed deposit interest generally calculated on the time of period we invest. while the simple principle “principal x rate of interest x time period divided by 100” or (P x Rx T/100).
What is the penalty for breaking FD?
The bank takes penalty for breaking the FDs before mature. The penalty is around 0.5% of the amount.
Fixed Deposit is tax-free?
The interest which we have earned from the Fixed Deposit is taxable under “Income from other sources”. The money savings in FDs under 80C of the Income Tax Act is exempt but interest earned under such investments is taxable.
Private Banks are safe for FDs?
The track record of the Bank is best then it can be safe for you. Please avoid local banks for FDs. The best and safe option is to open FDs in government banks and trusted private banks.
Last words from Mini invest
The Fixed Deposit can be the best option for you. If you want to earn a regular income from investment, Safe from risk and earn high returns than a savings account and current account, and many more other reasons.
An advice from me to you, If you are saving your money in the savings account and other places. then I recommend you to save your money in the Fixed Deposit account.
I hope you have understood and got the answer to your question-related to “How does Fixed Deposit work”. If you have any recommendations and feedback then you can give it to us by write in the comment box below.