Advantages and disadvantages of fixed deposits

A fixed deposit gives you a rate that stays the same for the whole term and a known amount at maturity. Bank FDs also carry insurance up to ₹5 lakh per depositor per bank. The price you pay is tax at your slab rate (the tax rate for the band your total income falls in), a return that can trail rising prices, and a lower payout if you break the deposit early.

What are the advantages and disadvantages of a fixed deposit?

The main advantages are a rate fixed for the term, a known amount at maturity and, for bank FDs, insurance up to ₹5 lakh per depositor per bank. The main disadvantages are tax at your slab rate, returns that can trail inflation (the rise in prices over time), and a cut in interest if you withdraw early.

A fixed deposit (FD) is money you place with a bank or company for a set term at a set rate. The mechanics are in what a fixed deposit is and how it works.

An NBFC is a non-banking finance company, a lender that is not a bank.

What are the benefits of a fixed deposit?

The benefits people search for are the advantages in the table above. You know the rate and the end amount from day one, and bank FDs carry deposit insurance up to ₹5 lakh per depositor per bank.

A rate you can read before you commit. Under RBI's rules in force from 1 October 2026, a bank must pay interest strictly as per the schedule of rates it has disclosed in advance on its website. Those rates are not subject to negotiation between you and the bank.

Insurance for bank deposits. The Deposit Insurance and Credit Guarantee Corporation (DICGC) insures savings, fixed, current and recurring deposits up to ₹5,00,000 per depositor per bank, principal and interest together. The principal is the amount you put in. Primary co-operative societies are not insured. This cover is for bank deposits only. Company and NBFC deposits have none.

Borrowing without closing the FD. Many lenders let you borrow against your own FD. At SBI, for example, the YONO app offers an overdraft, a facility that lets you draw money against the deposit without closing it. It runs up to 90% of the FD's value at 1 percentage point above the FD's rate (SBI's page, updated 21 May 2025). More in loans against fixed deposits.

A deduction, under the old regime only. A five-year tax-saving FD with a scheduled bank, under the Bank Term Deposit Scheme, 2006, counts under section 123 (the old Section 80C). The limit is ₹1,50,000 a year, for individuals and Hindu undivided families, under the old tax regime only. Its interest is still taxable, and corporate FDs do not qualify. See what a tax-saving fixed deposit is.

A deduction for seniors, also old regime only. Under section 153 (the old Section 80TTB), a senior citizen can deduct interest of up to ₹50,000 on bank, co-operative bank and post office deposits, under the old regime only. Company deposits are left out. See senior citizen fixed deposits.

Why can the fixed rate of an FD work against you?

The same rule that protects you when rates fall stops you gaining when they rise, because an ordinary FD keeps the rate it was opened at for its whole term.

The new rate reaches you only when the FD matures and you renew. Our page on auto-renewal explains what happens then.

Floating-rate deposits are the exception. Their rate moves with an outside market rate instead of staying fixed.

How do tax and inflation cut what an FD earns?

You pay tax on FD interest at your slab rate, and rising prices shrink what the rest of your money can buy.

For a resident individual in tax year 2026-27, bank FD interest is taxed at your slab rate as "Income from other sources". If you follow the accrual basis, which means counting interest as it is earned, the interest is taxed every year, even on a cumulative FD that pays only at the end.

The bank also deducts TDS (tax deducted at source) of 10% from a resident individual's interest once it passes ₹50,000 in a tax year, or ₹1,00,000 for a senior citizen. A company deducts it above ₹10,000, with no higher limit for seniors. TDS is not the final tax. If your tax on the year's total income will be nil, you can give the bank Form 121 (it replaces Forms 15G and 15H) so it does not cut TDS. Under 60, you can use it only if the income you declare is also below the tax-free limit. How FD interest is taxed has the full picture.

A worked example

Take a 43-year-old salaried professional with ₹4,50,000 of savings, taxed in the 20% slab, who is weighing a one-year FD. The 7% rate below is an assumption for the sum, not a current rate.

• Interest at 7% on ₹4,50,000 for one year: ₹31,500.
• Tax at 20% on that interest: ₹6,300. Add 4% cess (an extra charge on the tax itself): ₹6,552 in all.
• Kept after tax: ₹24,948, which is 5.54% on ₹4,50,000.

This assumes all the interest falls in the 20% slab. In the default regime, that means income of at least ₹16,00,000 before the interest and no more than ₹20,00,000 with it. In the old regime, at least ₹5,00,000 before and no more than ₹10,00,000 with it. No surcharge applies.

Now add inflation. For August 2026 (provisional), the all-India Consumer Price Index (CPI) inflation was 4.82% (Combined, base 2024=100), released by NSO, MoSPI, on 14 September 2026.

Suppose prices rose that much over the year of the FD. Your ₹4,50,000 would need ₹21,690 more to buy what it bought before. Your ₹24,948 leaves a gain in buying power of ₹3,258, about 0.7 percentage point, not 7. That gap is the real return. Last year's inflation is an illustration, not a forecast. How inflation affects a fixed deposit works through it over longer periods.

What does it cost to break an FD early?

You get the rate for the shorter period the money actually stayed, minus any penalty the bank disclosed at opening. If you leave before the minimum period, you get no interest.

RBI's rules say an individual's bank term deposit of ₹1 crore or less must have a premature withdrawal facility (early withdrawal before the term ends). The minimum term is seven days. Interest is paid at the rate for the amount and period the deposit actually remained with the bank, not at the rate you booked. If the penalty was not disclosed at acceptance, none can be charged.

SBI's schedule is one example: 0.50 percentage point off for retail term deposits up to ₹5 lakh, and 1 point for above ₹5 lakh but below ₹2 crore. Another bank may differ. How to avoid the penalty on premature withdrawal has a full example.

A tax-saving FD has a lock-in, a period when you cannot withdraw at all. Here it is five years, and a nominee can withdraw on the depositor's death.

An NBFC or a housing finance company (HFC) cannot repay a deposit in its first three months, except on the depositor's death or, for a listed emergency, some or all of the principal without interest. After that, early repayment is at the company's discretion or where the deposit terms allow it. From three to six months an NBFC pays no interest, while an HFC may pay an individual up to 4% a year. Corporate fixed deposits explains the rest.

Are long-term FDs better than short-term ones?

Neither is better in itself. A long FD locks today's rate and keeps the money tied up longer, while a short one gives access sooner but renews at whatever rate applies then.

What decides it is when you need the money, whether you might need part of it early, and how you would feel if rates rose after you locked in.

A longer term does not always pay more. On SBI's card in force since 15 December 2025, a 2-year FD paid 6.40% a year for the general public and a 5-year one paid 6.05%. That is what that one card shows, not a rule or a forecast.

Some people split money across several terms, an approach called laddering. Why diversification matters in fixed deposit investments covers it.

Who does an FD suit, and who does it not?

An FD fits money you will need on a known date and want back as a known amount. It fits less well for goals many years away where keeping up with inflation matters more than a fixed rate.

A school fee due in 14 months or a down payment set for next year is money with a date. A fixed rate and a known end value suit that.

Our comparison of an FD and mutual funds sets them side by side, and a wider look at safety and returns looks at the wider choices. The fixed deposit calculator shows the maturity amount for any rate and term.

Koshex offers fixed deposits, both bank and corporate, from ₹10,000. Only the bank deposits are insured, up to ₹5 lakh per depositor per bank. Koshex also offers tax-saving fixed deposits. See fixed deposits at Koshex.

If you are weighing alternatives, Koshex offers mutual funds as regular plans through an AMFI-registered distributor (Koshex holds ARN-154632). Details are on the mutual funds page.