What is Term Deposit? What are the Features of a Term Deposit?
Term Deposit Meaning: An Overview
Your bank account is the primary instrument that helps you to save money. It not only allows you to deposit your funds and withdraw them when needed but also lets you grow your corpus over time by offering interest. Term deposit is one such service that can help you grow your savings significantly. Let's take a look into the term deposit meaning in detail. Read on!
What is Term Deposit?
A term deposit is basically a fixed-term investment that involves depositing money in a bank account. These types of investments are mostly short-term and can range from one month to a couple of years.
What is Term Deposit Account?
A term deposit account is sometimes also known as an FD account. It is used as an investment avenue for a fixed tenure. You can use this account to deposit money in a bank or any other financial institution in order to earn benefits in the form of interest. Note that this type of investment comes with a pre-declared maturity date and a rate of interest you will earn based on your selected tenure. Moreover, you can either receive your interest payout at regular intervals or after the end of your maturity period.
How Do Term Deposits Work?
You cannot withdraw funds in your term deposit account anytime you want. Instead, your amount is locked for a particular period of time and you can only withdraw it after the end of your term. And in case you withdraw funds from your term deposit before its maturity, it can result in significant penalties.
Features of Term Deposit Account
Term deposits are those investment avenues that offer unique features and benefits that make them a popular form of investment. The most useful features are as follows:
- Fixed Interest Rate: The most unique characteristic of term-deposit is that its interest rates do not change according to the fluctuations of the market. This is the main reason why it is the most suitable form of investment for beginner investors.
- Fixed Investment Period: With a term deposit, you can choose your investment tenure as per your convenience. Generally, higher tenures are recommended as they offer the best interest rates.
- Secure Funds: Because the interest rate of a term deposit is not affected by market fluctuations, it is considered the safest investment option.
- Periodic / One-time Interest Payment: You can choose when you want to receive your interest payment. You have the option to receive interest periodically or after the maturity of your deposit.
- Penalty on Premature Withdrawal: When you opt for a term deposit, your funds get locked away for a specific period. And if you withdraw these funds before maturity, you will be levied a premature withdrawal penalty.
- Loans Against Term-deposit: Another perk of term deposits is, you can get a loan against them in case of emergency. You can get a loan upto 75% of your deposits.
- Tax Levied on Interest: The interest you earn from your term deposit is subjected to TDS ( Tax Deducted Source), under the Income Tax Act.
Types of Term Deposits in India
Apart from knowing what are term deposits, it is important to learn about their different types. Below are the most popular term deposits:
- Cumulative Deposits: These are the types of deposits that are mostly recommended for investors who want to create a corpus for the future. When you opt for a cumulative deposit, the bank repays your amount along with the interest earned on it in a lump sum amount after your term ends. Moreover, these deposits offer much higher interest as compared to other types of term deposits.
- Non-cumulative Deposits: If you want to earn extra with your existing income, then non-cumulative deposits are best for you as they pay interest at regular intervals. You can opt for receiving interest payments on a monthly, quarterly, 6-monthly, or yearly basis.
- Tax-saver Deposits: These types of term deposits are great if you want to enjoy tax benefits under the Income Tax Act of India. With this type of deposit, you can avail of tax deductions up to Rs. 150,000 on your term deposit.
- Term Deposits with Sweep-in Facility: The sweep-in facility allows investors to set an upper limit on their savings accounts. Any amount exceeding this limit can be used for a term deposit. And in case your savings account suffers a deficit, you can withdraw funds from the term deposits without suffering any loss. Only the interest will be deducted in this situation.
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Final Words
Term deposits have become one of the most popular forms of investment, especially for investors who want to grow their existing income in the safest way possible. From impressive interest rates to tax benefits, there are many perks of investing in these instruments. We have discussed everything about what are term deposits, we hope it helps you make the right financial decision.
What exactly is a term deposit?
Term deposits provide the following advantages: the assurance of a set return on your investment, although interest rates fall throughout the period. They often have inexpensive set-up and maintenance fees. Locking up your money might assist in reducing the urge to squander it.
What is the difference between a term deposit and a fixed deposit?
As the name suggests, a term deposit is extended for a pre-declared period that can range from a month to several years. On the other hand, FDs are used when the deposit exceeds a period of a minimum of 6 months. Note that the interest offered by deposits is much higher than what is provided by the banks on savings accounts.
Can I withdraw a term deposit early?
If you withdraw your term deposit before the end of its tenure, you will have to pay penalties in the form of premature withdrawal fees. For this reason, it is recommended to withdraw your deposits only after their maturity.
What happens when your term deposit matures?
Once your term deposit matures, your account is closed and you'll be repaid your principal amount along with the interest earned on it. You can either enjoy this lump sum amount or reinvest it by opting for a rollover.
Should I invest in a term deposit?
Term deposits provide the following advantages: the assurance of a set return on your investment, although interest rates fall throughout the period. They often have inexpensive set-up and maintenance fees. Locking up your money might assist in reducing the urge to squander it.
What is the security of bank term deposits?
Term deposits are among the most secure investments available. Unlike conventional investments like stocks or real estate, the user's deposit is safe from loss.
Is a term deposit account the same as a savings account?
A high-interest savings account is a type of bank account meant to accelerate your money's growth. It often offers a higher interest rate than other transaction accounts. A fixed deposit, or savings account, on the other hand, is where your money is put for a defined period at a specified interest rate.
Is a term deposit considered an asset?
The quick answer is that a term deposit is an asset. Regardless of whether the money is locked up for a certain length, they are regarded as an asset on the balance sheet.
Is a term deposit preferable to a savings account?
The yield on term deposits is more predictable than the return on most savings accounts since the interest rate is assured. Typically, there is no set-up charge for these accounts. They frequently provide a greater return on investment to compensate for your money, which is out of reach for the course of your term.