What is a Term Deposit?

 

A term deposit, also known as a fixed deposit or time deposit, is a type of savings account that offers a fixed interest rate for a predetermined period of time which can range from some weeks to several years. This means that you agree to lock up your money for a specified amount of time, in exchange for a higher interest rate than you would earn on a regular savings account. Based on the type of term deposit you choose; you will receive the interest payment periodically or when your investment term ends.

Simply put, term deposits are a safe and secure way to earn a guaranteed return on your money.

What is Term Deposit?

Term deposit is an investment instrument public sector banks and other financial institutions offer. A lump sum is deposited for a fixed period of 6 months to 10 years. The interest rate prevailing when opening the term deposit account continues throughout the investment term. The term deposit interest rates do not change during the deposit term. The invested amount and accumulated interest are paid out on maturity. A term deposit is the best investment option for risk-averse individuals who expect guaranteed returns.

Many investors get confused between term deposits and fixed deposits. While both deposits appear similar, term deposit vs fixed deposit can be explained. Term deposits are investments for a fixed period at a fixed interest rate. However, they include various deposits like recurring deposits and other time-bound deposits. Fixed deposits on the other hand are for a fixed period ranging from 7 days to 10 years. In other words, a fixed deposit can be a term deposit but not vice-versa.

Term Deposit Explained

Any amount deposited in a bank account will be available for the bank to lend to its customers in the form of personal loans, business loans, car loans, home loans, etc. The banks use the deposited amount to lend to other customers for a profit. In return, the banks will pay interest to the depositor for the amount invested. The depositor may withdraw the amount in a regular savings account, making it difficult for the bank to assess the amount available for lending at any time.

To overcome this hassle, term deposits were introduced.

Term deposit meaning:

Investing a certain amount for a predetermined period for a higher interest rate. The depositor agrees not to withdraw the amount before the fixed period. A higher interest rate is paid because of the restricted access to the amount in term deposits. A term deposit is, therefore, one of the safest investment options for risk-averse investors. The returns are guaranteed, and the investment is not subject to market fluctuations.

Key Features of Term Deposit

What is term deposit is better understood by understanding the key features of a term deposit. Here are the key features of term deposits that you should be aware of:

1. Fixed interest rate:

The interest rate is fixed when the account is opened and aligns with the period for which the deposit is invested. The maturity value remains unchanged, and your investment will not generate returns subject to market fluctuations.

2. Fixed term:

Term deposits range from 6 months to 10 years. The term is predetermined and cannot be changed. The longer the term, the higher the returns. You can choose the tenure depending on your financial goals and requirements.

3. Penalty for early withdrawal:

The amount invested in a term deposit cannot be withdrawn before the end of the term. But when you need funds, premature withdrawal is permitted but with a penalty. The penalty will be 0.5% to 1% depending on the financial institution. No interest is paid for deposits withdrawn before 7 days from the date of opening the deposit.

4. Safe and secure investment:

A term deposit is a safe way to earn interest on your money since there is no chance of capital erosion. They are relatively risk-free because they are backed by the Reserve Bank of India, which has made deposit insurance compulsory for all banks. Term deposits up to Rs one lakh are covered by the Deposit Insurance and Credit Guarantee Corporation scheme.

5. Low-risk/Conservative investors:

Term deposits are perfect for conservative and low-risk investors who want guaranteed returns on their investments.

6. Interest payment frequency

The frequency of interest payouts can be chosen at the time of opening the deposit account. Depending on their recurring needs, the depositor can choose between interest payouts on maturity or at periodical intervals, i.e., monthly, quarterly, half-yearly, or yearly.

7. Growth in Savings

The return on investment depends on the term chosen. A longer period earns higher returns, as the interest rates are higher and compounded. This makes term deposits more lucrative as compared to a regular savings account.

Aspects like fixed interest rates, compounding benefits, flexible tenure options, guaranteed returns, and safety of investment explain the growth in savings features of term deposits.

8. Rollover Term During Maturity

There is a facility for renewal of the term deposit at the end of the tenure. If you want, you may not withdraw the deposit on maturity and instead renew it automatically to create a new deposit. This will, however, be at the new applicable term deposit interest rates.

9. Loan Against Deposit

If you are in a financial crunch and need immediate funds, you can take out a loan against a term deposit. The bank lends up to 90% of the deposit amount (the percentage of the loan depends on the financial institution). The loan, along with interest, has to be repaid. The rate of interest applicable to the loan is between 1% and 2% above the term deposit interest rate.

10. Taxation on Interest

If the interest earned on term deposits is over Rs. 50000/- in the case of senior citizens in a financial year, the interest will be taxable. The tax is deducted at source at 10% for depositors with a PAN and at 20% for depositors without a PAN. It is deducted at the time of crediting interest and not on the maturity of the term deposit.

11. Limit on deposit balance

The minimum amount for a term deposit specified is Rs. 1000/- but this amount varies between financial institutions. However, there is no cap on the maximum amount that can be invested in a term deposit.

12. Insurance on deposit

As per RBI guidelines, each depositor in a bank is entitled to insurance cover up to a maximum of Rs. 5.00 lacs (principal and interest) under DICGC (Deposit Insurance and Credit Guarantee Corporation).

Term Deposit & Interest Rates

Now that we know about Term deposit meaning; it is necessary to know how term deposit and interest rates are related.

With borrowing rates consistently on the rise, consumers prefer to create a corpus by way of long-term savings, like term deposits, for future financial goals instead of relying on borrowings. As the borrowing rates increase, the banks also tend to pay higher interest rates on term deposits so that investors can get higher investment returns.

When term deposit interest rates dip, consumers prefer to borrow and spend. They are likely to look for investment options that provide higher returns.

The interest rate on the term deposits should be proportionate to the term and the amount invested. In other words, investors earn a higher interest for blocking their money for extended periods and also earn a higher interest for larger amounts. Banks have higher interest slabs for investments over a certain amount. Generally, term deposits over Rs. 1.00 crore earn a higher interest rate. This range again depends on the bank.

Inflation & Term Deposits

The price rise is the yardstick for measuring the inflation rate. If the inflation rate is higher than the interest rate on your term deposit, you are not earning enough to cope with the price rise. You can choose the ladder strategy, i.e., break the investment into several term deposits for different periods. This allows the term deposits to mature at regular intervals. You can withdraw or reinvest the amount at the new applicable rate.

Another investment option that helps beat inflation is the Unit Linked Investment Plan (ULIP). ULIPs are market-linked and encourage long-term investments with a minimum lock-in period of 5 years. You have the choice to invest in equity or debt funds according to your risk appetite. Regular investments in funds of your choice will give you more time for your money in the market and help you create a corpus for your financial goals.

Are Term Deposits a Good Investment Option?

Once you understand what is term deposit, you do see how good an investment option it is. Term deposits work especially for those who expect guaranteed returns and are wary of taking risks. Market fluctuations do not impact the return on investments made in term deposits. Adding a life insurance policy to this mix is like fortifying your investment fortress, ensuring that it remains unshaken by the uncertainties of life.

Term Deposit - Benefits

Term deposits offer a range of benefits such as assured reward, predictable payments, effortless investment, customizable tenure, secure investments, low minimum amount availability, return of entire principal amount. It is ideal for low-risk investors. Let’s delve into each benefit and understand why it makes sense to open a term deposit.

1. Assured reward:

Unlike volatile investments that can go south unexpectedly, term deposits offer a level of comfort and certainty. The interest rate is pre-decided which further protects you from market fluctuations and you know exactly how much your investment will grow.

2. Predictable payments:

Term deposits offer a reliable source of timely income; the frequency of which can be chosen, based on the needs of the depositor. The fixed interest rate guarantees a consistent stream of income.

3. Effortless investment:

Opening a term deposit is a quick and easy process. With just a few clicks or a short visit to your bank, a term deposit can be secured in a matter of minutes. No extensive financial knowledge is required which makes term deposits an accessible option for all.

4. Customizable tenure:

Term deposits offer flexibility in duration which allows depositors to tailor their investment based on their financial goals. Whether it is a short-term objective or long-time goal, there is a term deposit plan for everyone.

5. Secure investments:

Perfect for risk-free investments, term deposits are protected by the Deposit Guarantee Fund (DGF) which safeguards your principal amount up to a certain limit. This added layer of protection provides peace of mind to the depositor who knows that their investment is safe and sound.

6. Ideal for conservative investors:

Term deposits are risk-free and a good deal for investors who prioritise stability over high returns. They offer a secure way to grow your savings without the uncertainty of market volatility.

7. Low minimum amount availability:

A depositor can open a term deposit with as low an amount as Rs 1000 with most banks.

8. Entire principal amount returned:

The bank, or financial institution, returns the entire principal amount to the depositor at the end of the investment tenure.

Types of Term Deposits

For an informed decision regarding term deposits, it is not adequate to know the term deposit meaning. You should also be aware of the various types of term deposits available. They are:

Fixed Deposit

Fixed deposits have a fixed interest rate and a fixed term. However, the duration of a fixed deposit is flexible. It can range from a week to many years. The rate of interest of a fixed deposit solely depends on the amount of time the funds are locked in for. The depositor cannot access these funds without paying a penalty in return to the bank in case of a premature withdrawal.

Then there are tax saving fixed deposits, senior citizens’ fixed deposits, corporate and other fixed deposits, all of which are essentially fixed deposits with variations of lock-in periods, rates of interest and eligibility.

Recurring Deposit

A Recurring Deposit is when a depositor invests money at fixed intervals. Usually, this takes place once a month. The investments can earn interest till the maturity period. It is almost like opening several different Fixed Deposit accounts with the same maturity period for all of them. However, once the term is fixed for a Recurring Deposit, it cannot be changed. Just like Fixed Deposits, premature withdrawal of the funds will lead to a penalty levied by the bank. The minimum amount to invest in a recurring deposit is Rs 100 and this can be increased in multiples of hundred. The minimum amount of time for a Recurring Deposit is six months and the maximum is ten years.

Tax Saving Term Deposits

This deposit scheme is ideal for individuals intending to save taxes. A tax benefit for investments made under this scheme up to Rs. 1.50 lacs can be claimed under Section 80(C)^* of the Income Tax Act 1961. It has a lock-in period of 5 years and cannot be withdrawn prematurely. No loans will be granted against these deposits. However, interest earned on these deposits is taxable.

Senior Citizen Term Deposits

Senior Citizen Term Deposit scheme is designed exclusively for individuals above 60 years. These deposits earn a higher interest rate at 0.50% to 0.75% above the standard rate for term deposits. The period of the deposit can be from 7 days to 5  years. There are tax exemptions on interest earned on these deposits for senior citizens.

Flexi Term Deposit

Flexi Term Deposit is a combination of fixed deposit and savings account. The depositors earn a higher interest rate similar to fixed deposit rates while having easy access to funds whenever required. Part withdrawals are permitted in case of need without prematurely closing the deposit. The remaining amount after part withdrawal will continue to earn higher interest rates.

Short-Term Term Deposit

Short-term deposits are deposits opened for a period ranging from 7 days to less than one year. The investment earns interest higher than the savings account interest. This deposit type is suitable for individuals seeking low-risk investments with easy access to funds. Those who have short-term financial goals or wish to park surplus funds temporarily to earn higher interest can choose this scheme.

Auto Term Deposit

This deposit scheme is a combination of fixed deposit and savings accounts. These FDs provide the convenience of a savings account with a higher interest rate. The funds in the savings account over a threshold limit specified by the customer will be automatically converted to FDs and will earn a higher interest rate. Whenever funds are required in a savings account, the Auto Term Deposit will be liquidated to the extent required and the amount is transferred to the savings account.

NRI Term Deposits

NRI term deposits are designed for Non-Resident Indians (NRIs), Persons of Indian Origin (PIOs) and Overseas Citizens of India (OCIs). There are several types of NRI term deposits.

• FCNR (Foreign Currency Non-Resident) deposits will be held in designated foreign currencies. Foreign inward remittances or transfers from existing  NRE or FCNR accounts only are accepted. Both principal and interest are repatriable. The interest earned on these deposits is tax-free in India.
• NRE (Non-Resident External) Deposits will be held in Indian Rupees. Only funds remitted from abroad or transferred from existing NRE/NRO accounts will be accepted. Both principal and interest are repatriable. The interest earned on these deposits is tax-free in India.
• NRO (Non-Resident Ordinary) Deposits will be held in Indian Rupees. The income earned in India by way of rent, dividends, pension, etc can be invested in this account. The interest earned is subject to tax in India.

Savings Deposits

Saving deposits are ideal for short-term savings. The funds can be withdrawn as and when required. These deposits are a low-risk investment option. Their interest rates are much lower than the rates offered for fixed deposits. Interest earned on these deposits is tax free upto Rs 10,000 per year.

Cumulative and Non-Cumulative deposits

A cumulative deposit is ideal for long-term investment. The interest earned is compounded annually and reinvested along with the principal amount. This results in higher returns on maturity.

A non-cumulative deposit is suitable for individuals who require regular income for recurring expenses. The interest earned is paid out at monthly, quarterly, half-yearly, and annual intervals. The choice of interest payout frequency lies with the investor.

Corporate Term Deposit

Corporate Term Deposits are financial instruments offered by Corporate Companies. These deposits are similar to fixed deposits. They are open for a fixed period at a predetermined interest rate. The term deposit interest rates on Corporate Term Deposits are higher than the rates offered on fixed deposits. This is owing to the risk associated with the deposits. The risk is proportionate to the credit ratings by rating agencies like CRISIL or ICRA. Amounts invested in high-rated companies are considered safer.

Short-term and Long-term deposits

The period of term deposits ranges from 7 days to  5 years. Short-term deposits are investments made for less than 1 year. These deposits are among the types of term deposits suitable for short-term financial goals or for investing surplus amounts temporarily for higher returns. Long-term deposits are for a period over 1 year to 5  years. The returns on long-term deposits are much higher than short-term deposits owing to the compounding of interest earned.

Post Office Term Deposit

Post Office Term Deposit is a fixed-term investment option offered by Post Offices. It is considered a safe investment backed by a government guarantee. The tenure options available for the deposit are 1, 2, 3 and 5 years. The rate of interest depends on the tenure opted. This 5-year deposit scheme qualifies for tax deduction under Section 80(C) of the Income Tax Act 1961. With a low investment option, this deposit scheme caters to a broad range of investors. Premature withdrawal is allowed after completion of 6 months but with a penalty. 

Fixed Deposit vs Term Deposit

The terms “fixed deposit” and “term deposit” are often used interchangeably. However, there is one primary difference between the two which is that a fixed deposit is a type of term deposit that has a fixed interest rate. On the other hand, a term deposit can have a fixed or floating interest rate.

A fixed deposit is maintained for a longer period of time which further earns the depositor a higher rate of interest. A recurring deposit takes a certain amount of money and invests it every interval. However, it is ideal for those who want to invest a fixed amount of money every month. It all depends on the financial goals and aspirations of the depositor.

How to invest in a Term Deposit

Investing in a term deposit is a smooth process. Firstly, you will need to open an account with a financial organisation such as a bank. Then you have to decide how much money you want to invest and for how long you want to lock it up. Once your terms and conditions are decided, you will be easily able to open your term deposit account.

Summary

Term deposits are a secure and reliable investment option for risk-averse individuals. They offer guaranteed returns and are not subject to market fluctuations. To ensure comprehensive financial security, consider integrating a life insurance policy into your investment strategy. This combination is like having both a sturdy ship and a reliable lighthouse, guiding you safely to your financial goals, no matter the storms you encounter along the way.

FAQs about Term Deposit

1. What is a term deposit account?

A term deposit account is a type of savings account that offers a fixed interest rate for a predetermined period of time.

2. Is Term Deposit a Good Investment Idea?

Term deposit is a good investment idea for investors with a low-risk appetite. The investment is for a fixed period at a fixed interest rate. The return on investment is guaranteed. Long-term deposits are ideal for long-term financial goals. 

3. Is term deposit the same as FD?

Yes, term deposit and FD are the same thing. There is one primary difference between the two which is that a fixed deposit is a type of term deposit that has a fixed interest rate. On the other hand, a term deposit can have a fixed or floating interest rate.

4. What is a 1-month term deposit?

A 1-month term deposit is a type of term deposit that has a term of one month.

5. What are the examples of term deposits?

Examples of term deposits include fixed deposits, floating deposits, and recurring deposits.

6. Can I withdraw from a term deposit?

You can withdraw from a term deposit before the maturity date, but you will likely have to pay a penalty.

7. How is a term deposit better than a savings account?

Term deposits offer a higher interest rate than savings accounts. However, they also lock up your money for a fixed period of time.

8. Which is better, RD or FD?

Both RD and FD are recommended investment options. FD is suitable for lump-sum investment to earn higher returns. Whereas, RD is suitable for smaller savings at regular intervals.

9. Is Term Deposit Tax-Free?

Tax Saver Fixed Deposits with a lock-in period of 5 years are eligible for tax deduction up to Rs. 1.50 lacs under Section 80 C  of the Income Tax Act 1961. However, interest earned on term deposits is liable for tax deduction at source (TDS). The interest earned on NRI deposits like NRE and FCNR is tax-free in India.

10. Do tax-saving fixed deposits come with a minimum lock-in period?

Yes. The tax-saving fixed deposits come with a lock-in period of 5 years.

11. Can minors apply for an FD?

Minors cannot enter into a legal contract. A fixed deposit can be opened in the name of a minor but should be managed by a parent/guardian.

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