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Fixed Deposits: The Safety Net of Indian Families

Despite the rise of Mutual Funds and Stocks, the Fixed Deposit (FD) remains the most trusted financial instrument in India. It offers capital protection and guaranteed returns, making it ideal for your emergency fund or short-term goals.

1. Cumulative vs. Non-Cumulative FD

When opening an FD, the bank asks you to choose between two options. Choosing the wrong one can mess up your cash flow.

• Cumulative FD (Reinvestment): The interest earned is re-invested back into the FD. You get the principal + total interest at maturity. Best for wealth creation.
• Non-Cumulative FD (Payout): The interest is paid out to your bank account monthly, quarterly, or yearly. Best for retirees who need a regular income source.

Taxation on FD: The TDS Trap

Unlike PPF, FD interest is fully taxable according to your Income Tax Slab.

TDS Deduction: If your interest income from all FDs in a bank exceeds ₹40,000 (₹50,000 for Senior Citizens) in a year, the bank deducts 10% TDS.

Senior Citizen Benefits

Banks love senior citizens. They typically offer an additional 0.50% interest over the standard rates.

Some banks (like SBI Wecare or HDFC Senior Citizen Care) offer a "Premium" of 0.80% extra for tenures above 5 years. This makes FDs a critical component of retirement planning.

Premature Withdrawal Penalty

FDs are "Fixed" for a reason. If you break the FD before the maturity date, banks usually charge a penalty of 0.5% to 1%.

Alternative: Overdraft against FD
Instead of breaking the FD, you can take a loan against it. Banks offer up to 90% of the FD value as an overdraft. The interest charged is usually just 1-2% higher than your FD rate.