What Is a Fixed Deposit (FD)?

The basic mechanism

You deposit a lump sum for a chosen tenure (commonly ranging from 7 days to 10 years), at an interest rate fixed at the time of booking - that rate doesn't change even if the bank's rates for new FDs move up or down afterward.

How you receive the interest

• Cumulative FD - interest compounds and is paid out entirely at maturity, along with the principal.
• Non-cumulative FD - interest is paid out periodically (monthly, quarterly, or annually) as regular income instead, with only the principal returned at maturity.

Breaking an FD early

Most banks allow premature withdrawal, but typically charge a penalty (commonly around 0.5-1% lower interest than what was originally agreed, applied for the period the money was actually held) - so an FD trades some liquidity for its fixed, predictable return.

How safe is the money

Bank deposits, including FDs, are insured by the DICGC (a Reserve Bank of India subsidiary) up to ₹5 lakh per depositor, per bank - covering both principal and accrued interest combined, in the rare event a bank fails.

Tax treatment

Interest earned on an FD is fully taxable as per your income tax slab, and banks deduct TDS if total interest from all FDs at that bank crosses a threshold in a financial year - submitting Form 15G/15H can help avoid this deduction if your total income is below the taxable limit.

A related variant worth knowing

A Sweep-in FD automatically moves surplus savings-account balance into an FD for better interest, while still letting you access it instantly if needed - a hybrid worth knowing about if you want FD-like returns without locking money away completely.

The takeaway

An FD is the classic trade of flexibility for certainty - a fixed, known return, insured up to a limit, at the cost of a penalty if your plans change before maturity.