Term deposits are one the most preferred and ideal investment alternative for conservative investors who are constantly in search of a stable and secure form of investment which gives decent returns. Here, the funds are kept for a fixed tenure, and the investor is not allowed to withdraw the funds till the expiry of this tenure i.e. the maturity date. This is the reason they are referred to as Term Deposits as they are kept up to a particular tenure. There are a lot of details and aspect which needs to be understood regarding TDs. In this article, we will discuss and talk about the same.
BROAD CATEGORIES OF TERM DEPOSITS
Term deposits can be classified broadly in two categories, namely:
- Fixed Deposits
- Recurring Deposits
1. Fixed Deposits:
Fixed Deposits are considered a secure investment option that guarantees consistent decent returns, no market risk, special interest rates for senior citizens, various interest payment options, and income tax benefits.
2. Recurring Deposit:
In RDs, a fixed amount of funds is invested at a fixed interval of time. Generally, this interval is monthly. The invested funds earn interest on them till the maturity period. To put it simply, an RD is like opening several different FDs, each with the same maturity tenure.
HOW DO TERM DEPOSITS WORK?
A bank or financial institution’s primary functions are lending and borrowings. To lend money to the public in form of loans such as personal loans, car loans, home loans among others, the entity needs funds. It gathers these funds in form of current accounts, saving accounts, and Term Deposits. An entity is always in need of funds from investors especially in the form of locked-in capital such as TDs. It pays interest on the borrowings i.e. on savings deposits or term deposits and charges interest on loans.
FEATURES OF TERM DEPOSITS
1. Security of funds:
As the returns of the TDs are not affected by the changes in the economy and stock market, the investors’ funds are secure making it one of the safest investment alternatives.
2. Fixed-rate of return/interest:
The interest rate or returns are fixed on these TDs and are not subjected to fluctuations in the market.
3. Interest payment:
The investor has the choice to opt to receive the interest either periodically or maturity - yearly, half-yearly, quarterly, or monthly.
4. Loan against TD:
If in a situation of financial crunch, the investors need financial liquidity, they can avail a loan of up to 80 to 85% of the deposit amount.
5. Wealth Generation:
The stable and constant returns received on the investment ensure that the investors’ wealth grows even during difficult times in the stock market.
6. Deposit Insurance:
Under the RBI rules and regulations, any TD in a certified bank is eligible for an insurance cover up to Rs. 5,00,000 under the DICGC. (Deposit Insurance and Credit Guarantee Corporation)
7. Low investment limit:
The lower limit of investment differs as per the bank or financial institution but the lower limit is generally one thousand rupees. However, there is no upper limit on how much the investor wants to put in the TD.
The interest income earned on the TD is taxable and can be subject to a TDS under the Income Tax Act 1961.
TERM DEPOSIT VS FIXED DEPOSIT
Usually, both these terms are interchangeable and can be freely used for one another. To go in detail, in India and other Asian nations, FD is more commonly used while term deposit is popularly used in foreign nations. New Zealand, Canada, Australia use TD for such deposits with the entity. Another difference between an FD and TD is that the former is more significantly used in bank deposits whereas the latter is used for company deposits.
Frequently Asked Questions
1. What is a Term Deposit?
In Term Deposits, investors need to park their funds for a fixed tenure at a fixed interest rate. They guarantee consistent decent returns, no market risk, special interest rates for senior citizens, various interest payment options, and income tax benefits.
2. Is FD a part of the Term Deposit?
Both these terms are interchangeably used as we discussed. But TD is a broad term in which FD and RDs fall.
3. What is the taxation on interest income in TDs?
The interest income earned on the TD is taxable and can be subject to a TDS (Tax Deductible at Source) under the Income Tax Act 1961.
4. What is the top characteristic of Term Deposits?
Following are the top characteristic of TD:
- Security of funds
- Fixed interest rate
- Loan against FD
- Wealth generation
- Insured deposit