What Is A Term Deposit And How Is It Different From FD?
The recent couple of years have witnessed events such as the pandemic and global wars that have once again reiterated the need to be financially secure and independent. And one of the fundamental ways to do so is by investing in deposit-based investments. Term deposits and fixed deposits are two popular investment options offered by banks that give stable, fixed returns and are low in risk. While these two are often used interchangeably, they have distinct features and serve different financial purposes.
This article will explore what a term deposit is, what are its advantages and disadvantages and how is it different from a fixed deposit.
What Is A Term Deposit?
A term deposit is a fixed-income investment option offered by banks and other financial institutions like NBFCs, wherein the money is locked in for a specific period at a pre-determined interest rate.
The tenure for term deposits usually ranges widely between 7 days to 10 years.
Advantages Of Investing In A Term Deposit
- Fixed Interest Rates: Term deposit is a fixed-income instrument, which promises to give a fixed return along with the principal amount at the time of maturity.
- Secure: All term deposits are insured by credit guarantee corporation (DICGC), a division under RBI.
- Varying Tenures: Tenure for a term deposit can vary from a week to several years. Investors can choose a tenure as per their financial goals and needs.
Disadvantages Of Investing In A Term Deposit
- Penalty For Pre-Mature Withdrawal: If the amount deposited is withdrawn before the pre-determined tenure, it will incur a penalty ranging 0.5% to 1% depending on the financial institution. In addition to this, no interest is paid for deposits withdrawn before 7 days from the date of opening the deposit.
- Low Interest Rate: Term deposits usually offer a lower interest rate compared to other fixed income opportunities. Explore deals on Grip that will give up to 14% fixed returns.
- Doesn’t Beat Inflation: Due to the low rate of interest, term deposits are usually unable to beat the inflation rate.
What Is A Fixed Deposit?
While often used interchangeably, fixed deposits are not the same as term deposits. A fixed deposit is, in fact, a type of term deposit offered primarily by banks. As the name suggests, it is a fixed-income investment instrument wherein investors deposit a lump sum amount for a fixed tenure at a fixed interest rate.
Term Deposit Vs Fixed Deposit
Feature | Term Deposit | Fixed Deposit |
| Definition | It is a fixed-income investment option, which includes FDs and RDs. | It is a specific type of term deposit offered by banks and NBFCs. |
| Interest Rate | It can have either a fixed or floating interest rate through its tenure. | Has a fixed interest rate till maturity. |
| Charges On Premature Withdrawal | Applicable | Applicable |
| Issuer | Can be issued by post offices, credit unions etc, in addition to bank and NBFCs | Issued only by banks and NBFCs |
Both term deposits and fixed deposits are low risk investment options which offer fixed returns to investors. While fixed deposits are a type of term deposit, there are other types of term deposits, with varying features. Understanding the characteristics of each will help one make an informed choice, aligned with one’s financial goals and needs.
Frequently Asked Questions On Term Deposits And FDs
1. Are term deposits taxable?
Yes, interest earned from term deposits is taxable as per your income tax slab rate. Banks deduct tax at source if the interest amount exceeds INR 40,000. For senior citizens, the exemption limit is capped at INR 50,000. Also, the TDS is 20% if you do not provide PAN card details.
2. Is a term deposit better than a savings account?
Term deposits usually offer higher interest rates compared to a savings account. However, they also come with restrictions on withdrawals. An investor should consider his financial goals before opting for one of these.
3. Is FD a tax-saving instrument?
An investor can claim a deduction of a maximum of INR 1.5 lakh per annum under Section 80C of the Income Tax Act, 1961. by investing in a tax-saving fixed deposit account.
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This communication is prepared by Grip Broking Private Limited (bearing SEBI Registration No. INZ000312836 and NSE ID 90319) and/or its affiliate/ group company(ies) (together referred to as “Grip”) and the contents of this disclaimer are applicable to this document and any and all written or oral communication(s) made by Grip or its directors, employees, associates, representatives and agents. This communication does not constitute advice relating to investing or otherwise dealing in securities and is not an offer or solicitation for the purchase or sale of any securities. Grip does not guarantee or assure any return on investments and accepts no liability for consequences of any actions taken based on the information provided. For more details, please visit www.gripinvest.in
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