What is term deposit

Term deposits lock the deposits for a fixed period at a preset interest rate. A term deposit or fixed deposit is a sought-after financial instrument by millions of Indians owing to the various benefits it offers such as guaranteed returns, low risk, higher interest rate than savings account, loan facility and higher interest rates for senior citizens among many others. Fixed deposits are offered by all leading banks in india such as ICICI Bank, State Bank of India, HDFC Bank, IDBI Bank and Corporation Bank and among many others.

General features of term deposits

The salient features of term deposits are as follows:

• Fixed deposits are typically availed by conservative investors with a low risk appetite
• Fixed deposits are a traditional form of investment opted by millions across the country and therefore, easily accessible and time-tested
• A relatively ‘safe’ investment in that the interest rate on offer does not change for the nominated term
• Fixed deposits offer higher rates of interest compared to savings bank accounts
• It is important to note that fixed deposits up to Rs.1 lakh are insured under the Deposit
• Insurance and Credit Guarantee Scheme of India
• Fixed deposits are usually offered by banks for varying tenures ranging from seven days to 10 years or more
• Investors can open a fixed deposit account for a sum as low as Rs.100
• An investor can choose to withdraw his money at the time of any financial crisis, notwithstanding the penalty, unlike other investments such as real estate which can be time-consuming in terms of delivering cash at short notice
• Fixed deposits have low liquidity owing to a lock-in period. However, they encourages savings habit amongst investors
• Investors can take a loan against their fixed deposits, if need be. In most cases, banks offer up to 90% of the principal as loan amount
• Most leading banks offer higher interest rates on fixed deposits for senior citizens
• The interest rates on fixed deposits are revised every year by banks depending upon the overall monetary policy laid down by the RBI
• The interest earned on fixed deposits is taxable with the exception of tax saver fixed deposits offered by many banks
• A fixed deposit cannot be withdrawn before its maturity or only after a fixed period of time. Most banks levy a penalty for premature withdrawal of deposit amount
• Fixed deposits offer low returns compared to investment in equity markets
• Fixed deposits offer little protection against inflation in that the deposit amount at maturity may not be substantial when adjusted for inflation

Types of term deposits

Various banks offers different types of term deposits as listed below:

1. Short-term and long-term fixed deposits
2. Tax-saver term deposits
3. Senior citizen term deposits
4. Recurring deposits
5. Cumulative and non-cumulative fixed deposits
6. Post office time deposits
7. Company fixed deposit schemes
8. Sweep-in facility
9. Special deposit schemes for children

1. Short-Term and Long-Term Fixed Deposits

   Short term fixed deposits offer safety and assured returns. Short term fixed deposits are held for 30 days or below. The rate of interest* offered for deposits with tenures ranging from 7 to 14 days and 14 to 30 days hovers around 4 to 5% p.a for most banks. For tenures ranging from three months to 1 year, the interest rates on offer may vary from 7% p.a to 7.25% (Domestic/NRO/NRE deposits for deposits of Rs.1 crore and above but below Rs.5 crores). For long term fixed deposits of 1 to 5 years, the interest rates may vary from 7.5% p.a to 8.5% p.a. In many cases, the interest is calculated on a quarterly basis for accounts with tenures of 6 months or above. As a result, interest is calculated on a simple interest basis for deposits with tenures under 6 months in such cases.

2. Tax-Saver Term Deposits

   Resident individuals and Hindu Undivided families are eligible for tax saver fixed deposits. Tax saver deposits are offered by many leading banks in India such as HDFC and Kotak Mahindra among others. Tax saver fixed deposits can be booked on a quarterly and monthly pay-out basis for a lock-in period of 5 years (or up to 10 years). Depositors can save on tax on deposits up to Rs.1.5 lakh. In case of joint holders, the tax benefits are available to the first account holder as per 80C of the IT Act, 1961. Tax at Source is deducted as per prevailing income tax regulations. The interest rate* on offer in many cases, will be the deposit rate offered for a 5 year period. Many banks send a TDS certificate to their deposit holders every quarter (on TDS deductions) during a financial year.

3. Senior Citizen Term Deposits

   In most cases, all resident Indians above 60 years can avail of senior citizen term deposit schemes. A senior citizen who wishes to open a fixed deposit account has to submit a proof of his age. Most banks offer an additional 0.5% interest to senior citizens over the rate offered to regular citizens on fixed deposits. Nomination and premature withdrawal is allowed by most banks. The booking period may range from one week to 10 days. Deposit holders can choose to receive their interest on a quarterly and monthly basis or till maturity. Some banks offer greater liquidity by providing sweep-in facility and overdraft facilities for senior citizen fixed deposits. In some cases, senior citizen fixed deposits can also be tax saver deposits under section 80C of the IT Act.

4. Recurring Deposits

   In most cases, banks offer interest rates on par with regular fixed deposits for recurring deposits which allow customers to build significant savings by small investments every month. In most cases, senior citizens can avail of an additional 0.50% on recurring deposits as well. Resident individuals, societies, Hindu Undivided Families and public limited companies are eligible to avail of recurring deposits. Recurring deposits which offer guaranteed returns can be opened with a minimum deposit of Rs. 100 for up to 10 years. Many banks allow premature withdrawals on recurring deposits but not partial withdrawals. In most cases, TDS is deducted as per the section 194A of the IT Act. Some banks do not allow a customer to open a recurring account unless the latter has a savings bank account. Also, PAN may be mandatory to book a recurring deposit account. Many banks such as HDFC and Kotak Mahindra do not allow alterations in the instalment amount, tenure and due date of instalment. Furthermore, the interest is paid only upon maturity of the account. Some banks such as HDFC do not pay any interest to the depositor on his recurring deposit if the account is closed within the lock-in period of one month.

5. Cumulative and Non-Cumulative Fixed Deposits

   In a cumulative fixed deposit scheme, there is no fixed interest payable over a quarterly, half-yearly or an annual basis. In other words, the interest is compounded quarterly or yearly and payable on maturity of an account with the principal. However, in a non-cumulative fixed deposit scheme, the interest is paid on a quarterly, monthly or an annual basis. Furthermore, the interest earned (monthly) from a non-cumulative fixed deposit scheme is taxable. In a cumulative fixed deposit scheme, the maturity period may range from 6 months to 10 years. Cumulative fixed deposit schemes are suitable for individuals who do not require regular interest payment. As a result, cumulative fixed deposit schemes are also known as money multiplier schemes. On the other hand, non-cumulative fixed deposit schemes more suitable for pensioners in need of periodical interest payment.

6. Post Office Time Deposits

   There are over 93,55,825 post office time deposit accounts across India. This scheme offers various benefits such as portability of account from one post office to another. The tenures offered by post office time deposit accounts range from 1 to 5 years. Any resident Indian can open a post office time deposit accounts at any head post office or general post office after filling out the opening form provided by the post office. Interest is paid on an annual basis but is calculated on a quarterly basis. A post office time deposit account under five years is eligible for tax benefits under section 80C of the Income Tax Act, 1961. The minimum amount of deposit under this scheme is Rs.200 while there is no limit to the maximum amount. Under this scheme, a single account can be converted into a joint account and vice-versa. The current interest rates offered are 7.1% (1 year), 7.2% (2 years), 7.4% (3 years) and 7.9% (5 years) respectively.

7. Company Fixed Deposit Schemes

   Fixed deposits are offered by banks and NBFCs (Non-Banking Finance Companies). Typically, corporate/company fixed deposit schemes offer higher rates of interest than bank fixed deposits. Many companies offer fixed deposits at competitive interest rates to raise capital. In some cases, a company which has a low credit rating may offer higher interest rates to attract investors. Consequently, there is a view that investors should stay away from companies which offer an interest rate of above 15%. 'A' rated NBFCs are eligible to accept deposits as per RBI regulations. Most company deposit schemes have an initial lock-in period of three to six months. According to analysts, it is more prudent for investors to opt for shorter duration of deposits (1 to 3 years) to effectively review a company's ratings and servicing. Mahindra Finance Fixed Deposit scheme, Shriram Transport Finance Company and PNB Housing Finance among others are some of the leading company deposit schemes in India.

8. Sweep-In Facility

   Many banks such as Kotak Mahindra and HDFC offer special fixed deposit schemes known as ‘sweep-in facility’ wherein depositors can link their fixed deposit accounts to their current or savings accounts. The principal of the fixed deposit may be considered for the sweep-in facility. One of the advantages of this facility is that any deficit in a savings account need not be a cause of concern in that the exact amount is withdrawn from the fixed deposit account. Furthermore, deposits are broken in units of Rs.1, reducing loss of interest. There is a higher interest rate on a deposit till it is swept-in while the remaining amount in a fixed deposit will accrue interest. Some banks allow greater flexibility in terms of altering tenure, principal amount, maturity period and roll over period among others.

9. Special Deposit Schemes for Children

   Balika Shiksha Scheme and Sishu Mangal deposit scheme are deposit schemes for children launched by PNB and Allahabad Bank respectively. Under the PNB Balika Shiksha Scheme, girls who pass class 8 are eligible. The deposit under the said scheme can be withdrawn when the girl attains 18 years. Also, interest under this scheme is exempt from income tax. The Allahabad Bank Sishu Mangal deposit scheme is a fixed deposit scheme for minors aged between 1 and 15 years. A guardian has to open an account under this scheme. There is a limit on the maximum amount which can be deposited under this scheme.

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