Term Deposit: What is it and How it Works

Term Deposit, also known as Fixed Deposit, is an investment which is made by parking a specific amount of money within a financial institution for a prearranged time period. This investment is held by a fixed rate of interest throughout the life of the plan, which usually ranges from 1 month to 5 years. It is a popular mode of investment as its rates are majorly impervious to market fluctuations. An investor can receive the cumulated returns at the end of the tenure; any premature withdrawal is subject to charges applied by the respective institution. If the investor wishes to receive the interest income before the time of maturity, they can opt for a plan which provides the interest during weekly, monthly, quarterly or yearly intervals. Term Deposits can be availed through financial institutions like banks, Non-Banking Financial Companies (NBFCs), credit unions and building societies.

Highest Interest Rate offer by Banks in 2018

The rates of interest offered by various financial institutions differ according to the tenure of the investment and their company policy.

The following table illustrates the highest rates of interests offered by the banks in India (in alphabetical order):

*Above Interest rates are for deposit amount less than Rs.1 crore.

The latest available data indicates that IDFC Bank and Ratnakar Bank offer the highest rates of interest on term deposits. The interest rates spelled out for the senior citizens tend to be higher than that offered to the general public. However, certain banks do not provide higher rate of interests for senior citizens who have not opted for domestic term deposits.

Characteristics of Term Deposits

Term Deposits harbour a unique set of monetary features that make them a favoured form of investment among the general public.

The essential characteristics of term deposits have been enlisted below:

• Fixed rate of interest: The interest rates for the term deposits remain fixed and are not subject to market fluctuations till the date of maturity. It is advisable to consider term deposit plans that offer the highest interest rate.
• Safe investment option: Its resistance towards the changing economy, makes it a risk-averse investment opportunity that is widely availed.
• Predetermined tenor: An investor can choose the tenor of the term deposit plan based on the various plans offered by the financial institution. Generally, a longer tenor is accompanied by a higher rate of interest. This does not necessarily mean that the longest tenor guarantees the highest return. One must compare the interest-to-tenor ratios offered by the institution before choosing a plan.
• Interest payment frequency: An investor can choose to obtain the interest income either upon maturity or at periodic intervals i.e. fortnightly, monthly, quarterly or yearly.
• Growth in savings: The returns obtained upon maturity of the term deposit is predetermined, hence enabling investors to plan their finances across the lifetime of the plan. The interest rates attached to the deposit ensure the growth in savings periodically.
• Rollover term during maturity: In case, an investor does not wish to immediately utilize their returns, they can opt for a ‘rollover term’. This refers to the reinvestment of the returns upon maturity in a different term deposit and adding on to your interests.
• Penalty for premature withdrawal: Term deposits come with a predetermined lock-in period. A premature withdrawal is usually charged with a penalty fixed by the financial institution along with lowered interest income. An investor is advised to choose a tenor compatible with their financial needs to avoid early withdrawals.
• Loan against deposit: Instead of prematurely closing your term deposit, one can choose to avail a loan up to a maximum of 60-75% of the deposit amount. The rate of interest of such a loan tends to be higher than the interest rate on the term deposit.
• Taxation on interest: The interest income gained can be taxed as per Tax Deducted at the Source (TDS). An interest income which exceeds Rs.10,000 in a financial year can be taxed up to 10%. One can look to opt for Tax Saving Term Deposit plans.
• Limit on deposit balance: The minimum size of deposit that one can park is usually Rs.1,000. The lower limit differs with each financial institution. However, there is no universal upper cap on the amount that you can park.
• Insurance on deposit: The RBI has ruled that any savings deposit in a certified bank is entitled for an insurance cover up to Rs.1 lakh under the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Interest-Related Factors to Consider in a Term Deposit

An investment for a term deposit requires a significant amount of funds. One tends to consider options that would give them the highest returns and timely interest payments.

The following factors can be taken into consideration while opting for a term deposit plan:

• The returns are usually obtained as direct credit unless one opts for a rollover term.
• In case the bank with your savings account is not offering a lucrative term deposit plan, one can opt for a different bank. However, it is recommended that the latter is willing to credit the interest income in the savings account of the former bank.
• According to their financial needs, an investor can either choose to receive their accumulated interest income upon maturity or receive the interest at period intervals. These intervals could be fortnightly, monthly, quarterly or yearly.
• It is recommended to carefully know about the customer reviews of the term deposit plan that one is considering and compare viable options.
• An investor could also ensure that if a savings account could offer a higher interest rate than the term deposit plan that they are considering.

How to Apply for a Term Deposit

The process of applying for a term deposit is similar to that of a savings account. In fact, if a potential investor is looking to open a term deposit at a bank which already houses their savings account, the process becomes more simplified. A majority of the banks and other financial institutions have enabled online provisions to application with time-saving verification process. It must be noted that the eligibility criteria rolled out by these institutions could differ and hence, one must check their necessary parameters before applying for a plan.

How to Open a Term Deposit Account

An investor can open a term deposit account by visiting the bank or the financial institution where they wish to create the account. This would be followed by filling out an application form for the same and verification of the essential documents such as their PAN card and Aadhaar Card. They might also be required to submit photocopies of the requisite documents.

One can also opt to apply for a term deposit online through the steps mentioned (could vary with each bank):

• The prerequisite to applying for a term deposit online is to have access to an active net banking feature and a valid PAN card number.  
• After entering one’s username and password into the online portal, one gets access to the list of online services provided by the bank.
• One can select the option of creating a term deposit account option from the list.
• This would be followed by entering details about one’s account and nominee (if any).
• The next step would be to enter the amount that would be parked for the deposit account.
• It is important to consider the interest-to-tenor ration before selecting a plan that is best suited to one’s needs.
• In case of a non-cumulative term deposit, one can then opt for the interest payment frequency which would either be fortnightly, monthly, quarterly or yearly.
• If the request is successfully processed with accurate details, an account can be created ideally within 1-2 business days.

How to Close a Term Deposit Account

Closing a term deposit account prior to maturity is accompanied by penalty charges. If one wishes to prematurely withdraw the deposit, they must notify the respective bank or financial institution. This would require the submission of a document validating the closure towards the institution. The necessary charges would be deducted from the amount received by the investor.

A term deposit account be closed online through the following steps (could vary with each bank):

• If an account holder has access to net banking, they need to enter in their credentials i.e. username and password to log in to the bank’s website.
• The next step would be to select the ‘Close account’ option enlisted under the term deposit services.
• This would direct you to all the term deposit accounts that you have created with the respective bank. Select the account that you wish to terminate.
• This will be followed with a verification of your account details and a ‘confirmation’ prompt.
• The account holder's registered mobile number and email address would receive a notification and instruction that needs to be followed in order to complete closing process.
• After receiving a notification about the closure, it is suggested to check the savings account to ensure that the amount has been credited.

Types of Term Deposit

• Cumulative and Non-Cumulative deposits: In a cumulative term deposit, the interest income is reinvested in the parked deposit. Upon maturity, the investor receives returns which is inclusive of the interest. It is an ideal option for investors who do not require monetary additions to their income in regular intervals.

  A non-cumulative deposit includes regular interest payouts at fixed intervals. An investor selects the pay-out frequency i.e. fortnightly, monthly, quarterly or yearly, while opting for  a term deposit plan. This is preferred by those who would benefit from regular cash inflow apart from their income.

• Company Fixed Deposit schemes: The term deposits that are parked by the investors in financial companies for a predetermined time period fall within Company Fixed Deposit schemes. The investors gain an interest income based on a rate of interest dictated by the company. The deposits are unsecured and will be subject to the financial position in the economy. They are directed by the Companies Act under Section 58A. Most of the deposits of this nature come in with a lock-in period of 3-6 months. Companies like Mahindra Finance, Shriram Transport Finance Company and PNB Housing Finance offer schemes of this nature.
• Sweep-in facility term deposit: A term deposit with a sweep-in characteristic offers a higher interest rate than a regular savings account, but promises the liquidity that come with a savings account. This feature allows you to convert any amount in your savings account, above a fixed limit, into a term deposit. In case your savings account experiences deficit in balance, funds will be withdrawn from the term deposit.  Also, the deposit is broken down in units of Re.1, hence, preventing loss of interest. Banks like Kotak Mahindra and HDFC offer deposits with ‘sweep-in’ facility.
• Short-term and Long-term deposits: The tenor for short-term deposits ranges from 1 to 12 months. This plan is opted by investors who wish to receive returns soon after investment. The interest rate attached to short-term deposits is usually lower than longer tenors. The usual interest rate offered for 7 to 30 days ranges between 4%-5%, and 7%-7.25% for tenors from 3 months-1 year for a deposit of less than Rs.1 crore. It is recommended that an investor opt for a plan with a rollover option in case of such an investment.

  Long-term deposits are locked in with a maturity that ranges between 1 to 10 years. The interest rate ranges from 7.5%-8.25%. This is chosen by investors who wish to increase their savings across a long period of time.

• Senior Citizen term deposits: A majority of the banks and other financial institutions offer a higher rate of interests for the term deposits for senior citizens i.e. persons above 60 years of age. The usual difference in the rate is by 0.5%. They are further entitled to benefits such as nomination and premature closing of the account. A few banks also ensure a sweep-in and overdraft facility for them, thereby enabling liquidity of funds. The senior citizens could also avail tax-saving term deposits at select banks.
• Special deposit schemes for children: ‘Sukanya Samriddhi Account’ was launched by the government which stated that any girl child above the age of 10 could open a term deposit account. The deposits in the account will be made by the natural or the legal guardian. The minimum limit for the account is Rs.1,000 and at least, an amount of Rs.1,000 must be parked every financial year. Banks such as Punjab National Bank has launched ‘Balika Shiksha Scheme’ which enables a girl child who has passed 8th grade to open a term deposit account. The Allahabad Bank introduced ‘Sishu Mangal’ for children within the age bracket of 1-15 years.
• Post Office Time Deposit: An account of Post Office Time Deposit can be opened either under one individual’s account or as a joint account. This account comes with a nomination facility. Also, one can transfer their account from one post office to another, or own multiple accounts within the same post office. An account holder is not eligible to prematurely withdraw the deposit before 1 year and any withdrawal within 3 years gains a tax deduction of 2% of the total deposit value. On the other hand, any premature withdrawal after three years is subject to a 1% deduction. The minimum limit for the deposit is Rs.200 and the current interest rates are 7.1%(1 year), 7.2%(2 years), 7.4%(3 years) and 7.9%(5 years) respectively. Any deposit for a tenor longer than 5 years is eligible for the tax benefits prescribed under Section 80C of the Income Tax Act, 1961.
• Tax-saver term deposits: Tax-saver deposits are eligible for a tax deduction under Section 80C of the Indian Income Tax Act, 1961. The lock-in period for such deposits is 5 years and any interest above Rs.10,000 is taxable. The usual interest rates range between 5.5%-7.75%. Investors can save on tax for deposits up to Rs.1.5 lakh. A TDS certificate is provided to the account holders by many banks on a quarterly basis.
• Recurring Deposits: Recurring Deposits refer to the opportunity availed through the financial institutions that enable an account holder to deposit a fixed sum of money every month for a predetermined time period. The lower limit for the deposit amount is Rs.100 and the tenor can go up to 10 years. Premature withdrawal of the account is permitted by many banks, however, partial withdrawals will not be sanctioned. Other banks only allow individuals with a savings account within the bank to open an RD account. PAN card might be a prerequisite for many banks to open an account as well. The interest income can only be received upon maturity. TDS is applicable to the account as per Section 194A of the Income Tax Act. HDFC and Kotak Mahindra do not let the account holder to modify the prearranged terms of installment and tenor. Banks like HDFC do not pay interest to the account holder if the account is prematurely closed within one month of the lock-in period.

Faqs of Term Deposit

What is a term deposit account?

A term deposit account offers interest on the principal amount deposited by the account holder for a fixed term. The deposited amount in the term deposit account cannot be liquidated before the end of the term without a notice or loss of potential interest. A term deposit account can be opened for a fixed term where the maturity ranges from months to years. Based on the type of the account, the account holder can choose to receive the interest at monthly or quarterly intervals or on the maturity of the account. Whether it is an individual, partnership firm, private and public limited company, society, trust, HUF/specified association or any other establishment, the term deposit can be opened with various types of financial institutions, banks, credit unions, and building societies. The rate of interest in a term deposit account is fixed for a predetermined period of term.

What is meant by domestic term deposit?

A domestic term deposit is a product from the State Bank of India (SBI) that offers interest to the account holder for depositing a certain amount money for a fixed term. A domestic account allows liquidity before the maturity at a loss of interest. The bank offers various types of term deposits that can be opened for a term ranging from few days to a maximum of 10 years. The account offers different enhanced interest rates for senior citizens. At the end of the term, the account holder will be benefited with the interest along with the principal amount. He/she may choose to renew or close the account at maturity.

Some Special Term Deposit Schemes

• BOB Tax Savings Term Deposit
• BOI Short Term Deposit
• BOI Double Benefit Term Deposit
• Bank of India Quarterly/ MonthlyTerm Deposit
• PNB Anupam Term Deposit
• PNB Special Term Deposit
• BOM Maha Labh Term Deposit