Term deposit is a type of deposit account, which allows individuals to keep their funds invested for a pre-set tenure or 'term'. It can help them grow their deposited sum at a pre-determined interest rate, which is higher than the normal savings account. They can withdraw the accumulated funds after the end of their chosen term.
Features of term deposit
Following are some important features of term deposits:
- Pre-determined maturity period: Individuals can choose the maturity period according to their preferred investment goal. By choosing a longer investment period, they can enjoy an increased interest rate on their deposit.
- Stable interest rate: The interest rate on term deposit does not have any association with the market sentiment. It remains unchanged from the opening of the account up to the end of its maturity period.
- Additional interest rate for senior citizens: Senior citizen customers generally enjoy a higher interest rates on the term deposit, compared to regular customers. Therefore, if the objective is to grow the fund faster, individuals can invest in term deposits in the name of their parents.
- TDS on earning: Earnings from the term deposits are regarded as "Income from Other Sources". For this reason, financial companies subtract Tax Deducted at Source or TDS from the earned interest.
- Roll-over facility: Individuals who do not want to withdraw the maturity value of the term deposit can reinvest the amount for a fresh tenure. This way, they will earn on the deposited sum and the accrued interest.
Benefits of term deposit
Here are some advantages individuals can leverage by keeping their money in a term deposit account:
- Guaranteed earning: Owing to the stability of interest, individuals can enjoy a guaranteed income upon the completion of the maturity period. For this reason, they can make a plan regarding their upcoming expenses.
- Flexible payout frequency: Individuals can get the total earning from their term deposit at the end of their maturity period. They can also opt for non-cumulative payout option to get the earning periodically. The payout can be done monthly, quarterly, half-yearly or annually, whichever is convenient for investor.
- Coverage on deposit: All the deposits in a financial institution stay covered under Deposit Insurance and Credit Guarantee Corporation or DICGC insurance policy. Under this policy, individuals will get coverage for up to Rs.5 lakh on their deposits with a financial institution.
- Loan against deposit: In case of a sudden shortage of funds, individuals can collateralise their term deposits to get a loan. They can borrow up to 60-75 percent of the term deposit value.
Term deposit vs fixed deposit
Term deposit consists of two types of accounts; fixed and recurrent deposit. So, a term deposit is a broader phenomenon. In a recurrent deposit, individuals need to submit a fixed amount for up to a certain period that they chose while opening the account. As the account has a fixed maturity period, the accrued interest decreases with each subsequent instalment. Whatsoever, individuals generally pay in a lump sum to book fixed deposits.
Types of term deposit
Following are different types of term deposit policies:
- Cumulative and non-cumulative deposits: In a cumulative deposit, individuals get the earning of their deposit at the end of their maturity period. This can help them grow their money faster due to compounding. A non-cumulative term deposit can help them enjoy a periodical earning (monthly, quarterly, half-yearly or annually).
- Senior-citizen term deposits: Senior citizen term deposit is specially tailored for individuals above 60 years of age. They can secure a higher rate of interest on their deposited amount than the non-senior citizen customers.
- Short-term and long-term deposits: Individuals can invest in a term deposit for a short maturity period of 1 to 10 months. However, there are also term deposits with longer maturity periods 5 years or more.
- Tax-saver term deposits: In a tax-saver term deposit, individuals need to keep their money for a lock-in period of 5 years. They can enjoy the tax deduction benefit for up to Rs.1.5 lakh by investing in this instrument.
- Post-office term deposits: Individuals can also open term deposit account from post office branches. They can also enjoy tax deductions of up to Rs.1.5 lakh by depositing an amount for a period over or equal to 5 years.
- Term-deposit with sweep-in facility: These are mainly savings account with a certain upper limit. If their fund exceeds that limit, the extra amount will get converted into a fixed deposit. As a result, investors will earn extra interest on that amount.
Term deposit helps individuals grow their money in a systematic way at a stable interest rate. It can help them with a profitable income as the interest rate remains unchanged for the entire investment tenure.