Fixed deposit (FD) is an investment instrument offered by banks, post offices, and non-banking financial companies (NBFCs), where an individual deposits a lump sum amount for a fixed tenure at a predetermined rate of interest. Unlike savings accounts, fixed deposits have higher interest rates. The principal amount remains untouched during the tenure unless premature withdrawal is allowed, and the returns are guaranteed irrespective of market fluctuations.
Fixed deposits are a favored investment choice for those seeking security and predictable income. While some opt for cumulative FDs (where both interest and principal are paid at maturity), non-cumulative FDs enable investors to receive interest payouts regularly, such as monthly, quarterly, or annually. This article explores how a fixed deposit using an amount of ₹2 lakh can generate monthly income, alongside details of interest rates, calculations, and other factors.
How Does a Fixed Deposit Work?
When understanding what is fixed deposit, it’s important to know that when someone invests in a fixed deposit, the financial institution locks the money for a set tenure, which can range from 7 days to 10 years, depending on the terms chosen by the investor. The institution pays interest on this deposit, calculated based on the principal, tenure, and rate of interest. Fixed deposits are one of the least risky financial instruments, as returns are assured and do not depend on market volatility.
The interest rate for FDs varies across institutions and depends on factors such as the tenure and the type of FD chosen by the individual. Senior citizens usually receive slightly higher interest rates compared to general investors.
Generating Monthly Income from a ₹2 Lakh Fixed Deposit
To understand how 2 lakh fixed deposit interest per month, let us assess the returns more closely. Assume the following parameters for calculation:
– Amount: ₹2,00,000
– Interest rate: 6.5% per annum (banks offer interest rates ranging from about 5% to 7% for general investors and 6% to 8% for senior citizens depending on tenure)
– Tenure: 1 year
– Payout mode: Monthly interest payout
 Formula for Monthly Interest:
Fixed deposit returns can be calculated using the formula for simple interest:
Simple Interest (S.I.) = (Principal × Rate × Time)/100
Here, for monthly payout:
– Monthly Interest = (Principal × Rate)/(12 × 100)
 Calculation:
Using the formula above:
– Monthly Interest = (₹2,00,000 × 6.5)/(12 × 100)
– Monthly Interest = ₹1,083.33
Thus, by investing ₹2 lakh in a fixed deposit at a 6.5% annual interest rate, the individual will receive approximately ₹1,083 as monthly interest.
 Factors Influencing Monthly Income from Fixed Deposits
- Interest Rates: The rate offered by banks plays a critical role in determining monthly income. Higher rates will translate to better returns. Competition among banks may lead to varying rates, so choosing a bank offering favorable interest rates is essential.
- Type of FD: Non-cumulative fixed deposits that allow regular payouts are suitable for investors looking for monthly income. Cumulative FDs are meant for those seeking wealth accumulation, as interest is compounded and paid with the principal at maturity.
- Tenure: Long-term FDs typically provide higher interest rates as compared to short-term deposits. Make sure to evaluate tenure-related patterns offered by banks or NBFCs.
- Principal Amount: The higher the principal, the greater the interest income generated. For instance, a ₹5 lakh FD would fetch much higher monthly returns than a ₹2 lakh FD.
- Tax Deduction: Interest earned on fixed deposits is taxable, with 10% Tax Deducted at Source (TDS) applicable if the annual interest exceeds ₹40,000 for general citizens and ₹50,000 for senior citizens. This net income after tax must be factored into monthly returns.
Read Also: Navigating UPI Transaction Limits: Understanding Your Payment Cap
 Benefits of Fixed Deposits
- Safety: Fixed deposits are one of the safest investment options since both the principal and interest are guaranteed. Bank deposits of up to ₹5 lakh are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
- Flexible Tenure: Fixed deposits offer flexibility in choosing the tenure, catering to different financial needs—whether it’s short-term goals or long-term investments.
- Steady Income: Non-cumulative FDs provide a regular monthly income, which is beneficial for retirees or those looking for predictable cash inflows.
- Easy Process: Opening a fixed deposit is straightforward, with both online and offline options available at most banks or financial institutions.
 Limitations of Fixed Deposits
- Inflation Impact: Fixed deposits may fail to match inflation rates, affecting purchasing power over time.
- Taxation: Interest income is fully taxable, diminishing post-tax returns.
- Lower Returns: Compared to equity or mutual fund investments, fixed deposit returns are relatively low.
- Lock-In Period: Premature withdrawals can attract penalties, limiting liquidity to an extent.
Assumptions Regarding Interest Rates and Monthly Income
The interest payout calculation demonstrated earlier assumes a constant interest rate of 6.5% for general citizens. However, rates may vary based on tenure or specific financial institutions. For senior citizens, interest rates may be higher, potentially pushing monthly payouts up to ₹1,200–₹1,400 for the same ₹2 lakh principal amount, depending on the institution.
Comparison of Monthly Income Across Banks
Different banks offer varied fixed deposit interest rates. For comparison:
– Bank A offers interest at 6.25%, generating ₹1,042/month.
– Bank B might offer 6.75%, generating ₹1,125/month.
– Bank C provides senior citizens a rate of 7%, fetching them ₹1,166/month.
Always reevaluate terms and instruments carefully before investing.
 Important Considerations
While fixed deposits provide safe and steady income, it is important to consider broader financial aspects before making decisions:
– Compare rates across banks to secure the highest possible returns.
– Anticipate taxation implications as TDS could erode net interest earnings.
– Understand penalties for premature withdrawals and lock-in period terms.
Conclusion
Fixed deposits offer a simple and effective way to generate monthly income by investing a lump sum amount like ₹2 lakh. At a 6.5% annual interest rate, a ₹2 lakh investment provides approximately ₹1,083 as monthly interest. Although fixed deposits are low-risk and ensure guaranteed returns, they may be less lucrative than other investment options such as equities or mutual funds.
From safety to flexibility, fixed deposits are especially helpful for those who prefer predictable returns. However, the impact of inflation, taxation, and limited liquidity remain relevant considerations while assessing this instrument.
Summary:Â
Fixed deposits are a widely-preferred investment instrument that offers guaranteed returns over a specified tenure. By depositing ₹2 lakh in a fixed deposit account with a bank that provides 6.5% annual interest, an individual can earn ₹1,083 monthly income through non-cumulative interest payouts.
Compared to other investments, fixed deposits are safer but may have limitations such as taxation on interest and modest returns. Choosing the best fixed deposit scheme requires diligent evaluation of interest rates, tenure options, taxation policies, and premature withdrawal penalties.
Investors seeking a dependable monthly income must weigh the protection of their principal against the potential erosion of purchasing power due to inflation. Fixed deposits remain a sound choice for risk-averse individuals or retirees, provided they analyze all pros and cons before investing.
Disclaimer:Â
The calculations and examples provided in this article are for illustration purposes only. The investor must carefully evaluate the terms, conditions, and risks associated with the fixed deposit scheme and its interest rates before committing to any investment. Trading in the Indian financial market carries inherent risks; consult a financial expert or advisor for customized solutions based on your risk appetite and financial goals.