New investors are flocking to Term Deposits, also called fixed deposits, which have long been known as a safe investment choice. While opening a Term Deposit is virtually simple, there are a few things to consider
In this blog post, you will get everything you require to understand Term Deposit, including what is term deposit, its types, features, etc.
What is a Term Deposit?
A Term Deposit, also called a Fixed Deposit (FD), is a deposit provided by NBFCs (non-banking financial companies) and banks. In a Term Deposit, one is allowed to deposit a lump sum amount with a financial institution or bank for a particular period and at a pre-decided interest rate. This period often ranges from 1 to 10 years. It is one of the most secure investment options in the market with better features, including:
- Based on the interest rate last locked in, you may receive interest on the deposited money for the set duration.
- Once the interest rate is locked in, it remains unaffected by changes in market rates.
- You have the option of receiving interest payouts periodically or upon the maturity of Term Deposit.
- A Term Deposit usually comes with a lock-in period of 5 years, if it is a tax-saving one. The amount cannot be withdrawn within this time. Only scheduled commercial banks are allowed to take tax saving fixed deposits.
- NBFCs and HFCs like PNB Housing Finance Ltd do not accept Tax saving term deposits. With PNB Housing, Term deposit comes with a lock-in period of 3 months.
Features of Term Deposits
There are certain features of Term Deposits that you should be aware of before investing in them. They include:
- FD interest rates are never affected by market fluctuations. An FD is locked in for a set period. If the amount is withdrawn within this time, a penalty is charged.
- The depositor may receive interest on a monthly, quarterly, or yearly basis. In non-cumulative Term Deposits, interest is paid regularly at pre-decided intervals.
- As an investment alternative, Term Deposits have limited liquidity.
- There is no maximum limit on the amount that can be deposited in a Term Deposit account.
- The documents required for a fixed deposit are identity proof, address proof, and pan card.
Must Read: What Are The Features And Benefits Of Fixed Deposit Account?
How Many Types of Term Deposits?
There are many different types of term deposits on the market. By comparing them, you can select which one is ideal for you. The following list describes two major types of Term Deposits:
1. Cumulative Fixed Deposit:
- Interest is only accessible at the time of maturity and not periodically (monthly, quarterly, or annually)
- Cumulative Term Deposit interest rates are higher
- The tenure of a Cumulative Term Deposit varies from 1 to 10 years.
2. Non-Cumulative Fixed Deposit:
- The rate of interest is paid regularly at an agreed-upon frequency
- The tenure of a Non-Cumulative fixed deposit also ranges from 1 to 10 years.
- Suitable for those who demand a steady stream of interest-based income
Additionally, there are other types of Term Deposits, such as:
1. Company Deposits:
- Company Fixed Deposits are offered by Financial and Non-Banking financial companies (NBFCs).
- Investors place the deposit with companies for a fixed term with a fixed interest rate.
2. Senior Citizen Term Deposits:
- Offers a higher interest rate than other Term Deposits for people above the age of 60.
- A non-cumulative type Term Deposit is also available which offers interest rates payable monthly/quarterly/yearly.
3. NRI Term Deposits:
- NRIs, PIOs, and OCIs with NRO accounts are eligible
- Compared to ordinary savings accounts, this account pays higher fixed deposit interest rates.
- Fixed-term contract
- RTGS or NEFT from an NRO bank account is the preferred payment method.
- NRI can invest up to 36 months in PNB Housing fixed deposit
4. Tax-Saving Term Deposits:
- Only Scheduled Commercial Banks governed by RBI are allowed to raise tax saving fixed deposits.
- Deposit of a one-time amount is allowed with a maximum cap of ₹1.5 lakh per financial year for tax benefits.
- These deposits have a lock-in period of 5 years, during which withdrawals or loans are not allowed.
- Depositors can claim tax deductions of up to Rs 1.5 lakh in tax-saving Term Deposits.
- NBFC/HFCs like PNB Housing do not provide facilities for tax-saving fixed deposits.
Must Read: How to Open Fixed Deposit Account Online?
Benefits of Term Deposit
- No TDS on interest income up to Rs. 5000 per financial year
- Loan facility up to 75% of the deposit post completion of 3 months’ tenure.
- Facility to cancel the Term Deposit prematurely after a 3-month lock-in period
- Nomination facility as per NHB guidelines
- Up to 7.25%* interest rate for cumulative Term Deposits of 120 months and a 10.14% tentative yield to maturity
Interest Rates on Term Deposits
Interest rates on Term Deposits depend on several factors, including tenure, deposit amount, and the financial institution offering them. Typically, longer-term deposits yield higher interest rates, although some institutions provide attractive rates for short-term deposits as well. Senior citizens often receive preferential rates, usually 0.20% to 0.30% higher than regular depositors.
Tax Implications of Term Deposits
The interest earned from Term Deposits is subject to taxation and falls under Income from Other Sources. It is taxed based on the depositor’s applicable income tax slab. If the annual interest earned exceeds ₹40,000 (₹50,000 for senior citizens) in a financial year, banks deduct TDS (Tax Deducted at Source) at 10%. However, if the depositor does not have taxable income, they can submit Form 15G (for individuals) or Form 15H (for senior citizens) to prevent TDS deduction. Tax-saving fixed deposits allow a deduction of up to ₹1.5 lakh under Section 80C, but the interest earned remains taxable. Unlike bank FDs, NBFC Term Deposits do not qualify for tax-saving benefits, making them suitable primarily for wealth accumulation rather than tax planning.
How to Choose the Right Term Deposit
- Compare Interest Rates Across Banks and NBFCs: Interest rates on Term Deposits vary between banks and NBFCs, and selecting the right one can significantly impact returns.
- Choose Between Cumulative and Non-Cumulative Term Deposits: A Cumulative Term Deposit is ideal for those looking to grow their investment over time, as interest is compounded and paid at maturity. On the other hand, a Non-Cumulative Term Deposit is better suited for those who need regular payouts.
- Check Safety Ratings Before Investing: Check the CRISIL rating of the financial institution where you are applying for term deposits. A higher credit rating indicates stronger financial stability. PNB Housing has CARE ‘AA+/Stable’ & *CRISIL ‘AA+/Stable’ rating, which indicates a high level of safety.
- Understand Premature Withdrawal Rules: Not all Term Deposits allow premature withdrawals without penalties. If an investor places ₹3 lakh in a 5-year Term Deposit but needs funds after 2 years, they might lose a certain percentage of the interest rate as a penalty. Financial institutions also enforce a minimum lock-in period when no early withdrawal is allowed. If liquidity is important, choosing a shorter tenure or a provider with flexible withdrawal terms is advisable.
Wrapping Up
Term Deposits remain a reliable and secure investment option, especially for risk-averse investors looking for guaranteed returns. With multiple types of term deposits available, choosing the most suitable one depends on individual financial goals, whether it's wealth accumulation, regular income, or tax savings. Banks offer stable and government-backed security, while NBFCs often provide higher yields but with varying risk levels. Comparing interest rates, tenure options, and withdrawal policies can help investors reap the benefits of term deposits. By aligning Term Deposits with financial goals and tax planning strategies, one can optimize returns while ensuring capital protection and liquidity when needed.
FAQs
How do I open a term deposit account?
To open a term deposit account, visit a bank or NBFC, provide proof of identity/address, choose the deposit amount and tenure, and complete the application. Many institutions also offer online account openings for added convenience.
What is the interest rate for term deposits?
Interest rates on Term Deposits vary based on tenure, financial institution, and depositor category. Senior citizens typically receive an additional 0.20%–0.30% interest over regular rates.
Can I withdraw my money before the maturity date?
Yes, but most Term Deposits impose a premature withdrawal penalty, usually a 1% lower interest rate or a fixed penalty fee. Tax-saving Term Deposits cannot be withdrawn before five years and some term deposits also come with a minimum lock-in period.
Can senior citizens get a higher interest rate on term deposits?
Yes, senior citizens (60+ years) usually receive a preferential interest rate, typically 0.20%–0.30% higher than standard rates. Many financial institutions offer special senior citizen Term Deposit schemes with better returns and flexible payout options.
