Fixed Deposit
Also written FD · Fixed Deposit (FD) · Bank fixed deposit · Fixed Deposit Account
Money placed with a bank for a fixed term at an agreed rate of interest. Safe and simple, but the interest is taxable, and TDS applies once interest crosses a stipulated amount.
In plain language
A fixed deposit is the simplest promise in banking. You give the bank a sum of money, you agree how long the bank keeps it, and the bank agrees the rate of interest it will pay you for that time.
Nothing about the deal changes after you sign. The rate is fixed on day one, so you know in advance what you will get back.
People choose an FD for safety and liquidity, not for high returns. The workbook says plainly that bank deposits are "preferred more for their liquidity and safety than for the returns".
How it works
What the booklet (Chapter 4) says about an FD:
- It "involves placing funds with the bank for a fixed term at a certain interest rate".
- Tenure and rate of interest vary from bank to bank. There is no single national FD rate.
- Senior citizens may get extra benefits on the interest rate.
- Interest earned is subject to Tax Deducted at Source (TDS) beyond a stipulated amount.
- You can take a loan against a fixed deposit of 75 to 90% of the deposit amount, so you need not break the FD in an emergency.
- The Central Government deposit insurance scheme covers deposits up to Rs 5 lakh per customer in that particular bank. If a bank fails, the Government steps in and returns up to Rs 5 lakh of your savings in that bank.
A special case is the Special Bank Term Deposit Scheme: a tax-saving FD with a 5-year lock-in, relief under Section 80C, and no premature withdrawal or loan allowed.
The formula
If interest is added once a year (a simplifying assumption; banks set their own compounding rules):
Maturity value = Deposit × (1 + annual rate)^years
Loan available against an FD = 75% to 90% × deposit amount (the range the booklet gives).
A worked example
The rate below is illustrative, not a quoted bank rate.
Kavita, a nurse in Pune, puts Rs 3,00,000 into a 3-year FD at 7% a year, interest added once a year.
- After year 1: Rs 3,00,000 × 1.07 = Rs 3,21,000
- After year 2: Rs 3,21,000 × 1.07 = Rs 3,43,470
- After year 3: Rs 3,43,470 × 1.07 = Rs 3,67,513 (rounded)
In year 2 her son needs Rs 2,00,000 for college fees. She does not break the FD. At 75% to 90% of the deposit, the bank can lend her between Rs 2,25,000 and Rs 2,70,000 against it, so Rs 2,00,000 is within reach and her deposit keeps earning.
Her sister holds Rs 7,00,000 in FDs in one bank. The deposit insurance limit is Rs 5 lakh per customer in that particular bank, so Rs 2,00,000 of that money is above the covered amount.
Why NISM asks about it
Chapter 4 (Savings Related Products) lists the FD in the table of bank deposit types, gives the 75 to 90% loan against FD range and the Rs 5 lakh deposit insurance limit. Chapter 2 uses the FD as its example of an asset and puts it on the "investment" side of the savings-versus-investment table. Chapter 10 brings back the 5-year tax-saving deposit under Section 80C. Expect direct questions on the loan range, the insurance limit, and whether TDS applies.
Common exam traps
- Rs 5 lakh is per customer, per bank. It is not Rs 5 lakh per account, and not Rs 5 lakh across all banks put together.
- TDS applies to FD interest; not to savings account interest. The booklet says there is no TDS on interest on a savings bank balance, but that interest is still taxable.
- Loan against FD is 75 to 90%, not 100%.
- The 5-year tax-saving FD allows no premature withdrawal and no loan. An ordinary FD can be broken early; this one cannot.
- Rates are not uniform. Tenure and rate vary from bank to bank; senior citizens may get a higher rate.
- In the Chapter 2 table an FD counts as an investment and is "comparatively less liquid" than money in a savings account.
Check yourself
1.A businessman needs ₹3,00,000 for four months and holds a ₹5,00,000 fixed deposit maturing in two years. What does the chapter suggest as an alternative to breaking the deposit?
- a)Opening a Special Bank Term Deposit Scheme and borrowing against that
- b)Taking a loan against the fixed deposit, available up to 75 to 90 per cent of the deposit amount, so the deposit keeps running
- c)Converting the fixed deposit into a recurring deposit
- d)Withdrawing from a payment bank account instead
Show the answer
Answer: (b) Taking a loan against the fixed deposit, available up to 75 to 90 per cent of the deposit amount, so the deposit keeps running
The chapter states: "It is also possible to get LOANS FROM BANKS AGAINST FIXED DEPOSITS UP TO 75 TO 90% of the deposit amount." Seventy-five per cent of ₹5,00,000 is ₹3,75,000, so ₹3,00,000 is comfortably available. The comparison is decisive for a short, known need: breaking the deposit means the bank typically pays a reduced rate for the period actually run and may levy a penalty, and the deposit must then be rebuilt from zero; borrowing means the FD keeps running and keeps earning while interest is paid for four months only. The judgement reverses if the need is long or open-ended, or if it exceeds the borrowing limit. Option (a) fails on the product's own terms — the Special Bank Term Deposit Scheme allows "no premature withdrawal/loan" at all during its five-year lock-in. The general rule worth carrying: before breaking any long-term asset, ask whether you can borrow against it instead.
2.Under the Central Government deposit insurance scheme, deposits are insured up to:
- a)₹1 lakh per account
- b)₹5 lakh per customer in that particular bank
- c)₹5 lakh per deposit
- d)₹10 lakh per customer across all banks
Show the answer
Answer: (b) ₹5 lakh per customer in that particular bank
"Central Government deposit insurance scheme ensures that all deposits are insured by the Government UP TO A LIMIT OF ₹5 LAKHS PER CUSTOMER IN THAT PARTICULAR BANK. So, even in case of a failure of a bank, depositors are assured that the Government will step in and return up to ₹5 lakhs of their savings in that bank." Three words carry the rule: per customer, per bank. It is not per account and not per deposit, so a person holding a savings account, two fixed deposits and a recurring deposit at the same bank has one ₹5 lakh cover across all four. Split the same money across three banks and each brings its own limit. The chapter adds that "for complete details on the scheme, one can refer the website of Reserve Bank of India, from time to time."
3.Which statement about interest on a savings bank account balance is correct?
- a)TDS is deducted and the interest is not taxable thereafter
- b)No TDS is deducted, but the interest is taxable in the hands of the depositor
- c)Neither TDS nor tax applies to savings bank interest
- d)TDS is deducted only for senior citizens
Show the answer
Answer: (b) No TDS is deducted, but the interest is taxable in the hands of the depositor
The chapter states it in one line: "NO Tax deducted at Source (TDS) on interest on SB account balance, BUT TAXABLE IN THE HANDS OF DEPOSITOR." Two different things are being described and candidates routinely collapse them. TDS is the bank cutting tax before paying you — on a savings account the bank does not do this. Taxability is whether the income belongs in your return — savings interest does. So the interest arrives whole and is still yours to declare; the bank's silence is not permission. Contrast the fixed deposit and recurring deposit, where "interest accrued or earned is subject to TDS beyond a stipulated amount" — and where many depositors then wrongly assume the deduction settles the matter. TDS is a collection mechanism, never a settlement of liability.
Where this is taught
Free preparation for NISM Series SEBI-ICERelated terms
- LiquidityThe degree of ease with which you can turn an investment back into cash at a fair value — one of the three pillars of investing, alongside safety and return.
- Deposit insuranceThe Central Government scheme that insures every bank deposit up to Rs 5 lakh per customer in a bank, so depositors get that much back even if the bank itself fails.
- Recurring DepositA bank deposit where you put in a fixed amount every month for a set term. It earns more than a savings account, and TDS applies beyond a stipulated amount of interest.
- Section 80CThe income-tax deduction for money put into life insurance, provident fund, ELSS, five-year bank deposits, NPS Tier 1, NSC and home-loan principal, capped in aggregate at Rs 1,50,000 a year.
- Special Bank Term Deposit SchemeA five-year, tax-saving bank term deposit eligible for a Section 80C deduction, with no premature withdrawal and no loan against it allowed.
- Transferable debt contractA debt instrument whose terms let the holder sell it to another investor before maturity, as against a non-transferable one, such as a company deposit, which must be held to maturity.
- Corporate Fixed DepositA fixed-term deposit placed with a company, financial institution or NBFC rather than a bank, under Section 76 of the Companies Act — unsecured, leaving a defaulting company's depositor nothing to recover against.
- Simple interestInterest earned only on the amount you first put in (the principal). The interest is not added back, so it never earns interest of its own, unlike compound interest.
- AssetsThings you own that have economic value, such as a bank balance, a fixed deposit, a house or a car. Assets minus liabilities gives your net worth.
- Nominal returnThe stated rate of return quoted on an investment before adjusting for inflation — as opposed to the workbook's real rate of return, which accounts for it.
- Savings Bank (SB) accountAn ordinary bank savings account paying low, liquid interest, with no TDS on the interest itself — distinct from the zero-balance Basic Savings Bank Deposit Account.
- Section 80TTAThe deduction against tax on savings bank interest, available only to an individual or HUF, and only for a savings account with a bank, post office or cooperative bank — not for fixed deposit interest.
- TDS — Tax Deducted at SourceTax the bank deducts before crediting certain interest to you — absent on savings bank interest but charged on fixed and recurring deposit interest beyond a stipulated amount the workbook does not state.
- Current incomeReturn that arrives periodically while you still hold the investment — rent, interest or dividends — as against capital gains, which are realised only when the investment is sold.
- Tax-free bondsBonds issued in the past by infrastructure public sector enterprises such as HUDCO, NHAI, PFC, REC and IRFC whose interest is not taxed, so they carry a lower coupon than comparable taxable bonds.
- DICGC insuranceDeposit insurance from the Deposit Insurance and Credit Guarantee Corporation covering up to Rs 5 lakh per depositor per bank, including principal and interest across all branches.
- Tax-adjusted returnThe return an investor actually keeps after tax is deducted — the figure that tells them what income is really available to spend, unlike the pre-tax rate quoted on the product.