term deposits

What Is Term Deposits? Meaning, Features, Types

Term Deposits: Term Deposits are otherwise known as Fixed Deposits are an investment vehicle in which a lump-sum sum amount is deposited for a fixed length of time, ranging from one month to five years, at an agreed rate of interest. Organisations such as Banks, NBFCs (Non-banking financial companies), Credit unions, Post offices, and other financial organisations will have the options of Term Deposits. In this article, we have explained all the details of Term Deposits, it’s types. Read on to find out more.

Types of Term Deposits

The types of term deposits are:

  1. Fixed Deposits
  2. Recurring Deposits

Classification of Term Deposits

The term deposits are further classified into several ways which are discussed below:

Senior Citizen Term Deposits

A senior citizen is someone who has reached the age of sixty can enrol for this account. Most banks and financial institutions offer senior citizens a greater interest rate on term deposits. At some banks, senior citizens are also eligible for tax-advantaged term deposits.

Post Office Term Deposits

Certain financial services are also available in post offices. The Post Office Term Deposit is one such service. It can be opened as a single account or as a joint account. Post office term deposit accounts can be transferred from one post office to another, or many accounts can be held at the same post office.

The minimum deposit amount is Rs.200, and the current interest rate is 7.9% for a period of five years. Any deposit with a term of more than five years is eligible for tax benefits under Section 80C of the Income Tax Act of 1961.

Tax Saving Term Deposits

Section 80C of the Income Tax Act allows for a tax deduction of up to Rs 1.5 lakh on tax-saver deposits. These tax-saving term deposits have a 5-year lock-in period, and any earnings beyond Rs 40,000 are taxable. Interest rates typically vary from 5.5 percent to 7.75 percent.

Special Term Deposit Schemes For Children

There are a few unique deposit schemes dedicated to children’s welfare. The government’s “Sukanya Samriddhi Account” aims to improve the financial security of girl children over the age of ten. Different banks have different plans aimed at the financial well-being of children, such as Allahabad Bank’s “Sishu Mangal” deposit programme and Punjab National Bank’s “Balika Shiksha” programme. So any individuals can check with banks for children’s term deposit schemes.

Cumulative Term Deposits

Investors who do not require regular monetary income from their investment can choose a cumulative term deposit.  As a result, the interest gained is re-invested in the deposit and paid out in one lump sum at the conclusion of the term.

Non-Cumulative Term Deposits

A non-cumulative term deposit is for investors who want a consistent rate of return. The interest on a non-cumulative term deposit is credited to the investor’s account at regular intervals, such as monthly, quarterly, or annual.

Short Term Deposits

A short-term deposit has a lock-in duration that might be anywhere from one to twelve months. Short-term deposits are appropriate for investors who want to get their money back quickly.

Long Term Deposits

Lock-in periods for long-term deposits range from one to ten years. These deposits provide a greater interest rate than short-term savings accounts.

Features of Term Deposits

The features of characteristics of Term Deposits are discussed below:

  1. Interest Amount: The investor has the choice of receiving interest income at maturity or on a monthly, quarterly, or annual basis.
  2. Economic Growth: The consistent interest received on the investment assures that the investors’ wealth grows even during market downturns.
  3. Rollover: If an investor’s money isn’t needed by the term deposit’s maturity date, the deposit can be rolled over for a new term. The phrase “rollover” refers to the process of reinvesting maturity funds in a new term deposit and increasing the interest rate. As a result, when a term deposit matures, an investor does not have to use their money right away.
  4. Fixed-rate of Interest: The rate of interest on term deposits is fixed and not affected by market changes.
  5. Investment Safety: Since the term deposit interest rates are unaffected by economic fluctuations, it is one of the safest investment options accessible.
  6. Loan Against Deposit: If an investor needs financial liquidity in an emergency, they can borrow up to 60-75 percent of the deposit amount.
  7. Predetermined Investment Period: The investor has the option of choosing the tenor of the investment depending on the financial institution’s goals. The institution’s interest rate will typically be greater for a longer tenor. However, before investing, it’s a good idea to compare interest-to-tenor ratios.
  8. Low Investment Limit: The minimum investment amount varies depending on the financial institution, but it is usually Rs 1000. However, there is no maximum amount that can be placed in term deposits.
  9. Deposit Insurance: Any deposit in a qualified bank is entitled to an insurance cover of up to Rs 1 lakh under the Deposit Insurance and Credit Guarantee Corporation, according to RBI regulations (DICGC).

Drawbacks of Term Deposits

Though bank term deposits seem to be helpful, there are few disadvantages which one will have to consider and they are:

  1. Since term deposits come with a fixed tenor, it is considered ‘locked-in’. If the investor opts to withdraw from the deposit before the lock-in period ends they are liable to pay a penalty to the financial institution along with lowered interest income.
  2. Interest Earned on a deposit is taxable income and can be subject to a Tax Deducted at Source deduction under the Income Tax Act (TDS).

 FAQs on Term Deposits

Q. What are the risks of term deposits?
A. It might be costly to withdraw funds from a term deposit before it has matured. Fees and interest rate reductions apply to early withdrawals. You also won’t be able to add to your deposit with more money. With this in mind, putting your money in a term deposit can be a dangerous option if you need to make any deposits or withdrawals before the term deposit matures.

Q. Is term deposit and fixed deposit the same?
A. Yes, a term deposit is also known as fixed deposit. When a deposit is extended for a certain duration, such as 3 months, 6 months, or more, a term deposit is used, but a fixed deposit, or FD, is used when the deposit is for a period of six months or longer.

Q. What is the penalty for breaking a term deposit?
A. Many banks will refuse to pay interest on a term deposit that is ‘broken’ early, or will pay less. If you want to withdraw money from your term deposit, certain banks will require a 31-day notice. If the term is less than 31 days old, you may not be able to access the money until maturity.

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