Time Deposit
What is Time Deposit?
A Time Deposit scheme, also known as a term deposit, is a deposit account that comes with a pre-set maturity date and offers a higher interest rate than a regular savings account. The interest earned from these schemes depends on the maturity period, the longer the duration, the higher will be the interest earned by the depositor.
There is various form of deposit and investment schemes that are provided by Indian banks and other financial institutions. A time deposit is one of the investment tools that are offered by banks and comes with a pre-set date of maturity. These deposit schemes ensure low risk compared to other forms of investment available in the market and usually prevent the depositors from premature withdrawal, thereby offering higher returns on maturity. Here are more details about time deposit schemes.
How Does Time Deposit Work?
Here are some of the significant points that explain how a time deposit works:
- This is a low-risk investment where customers deposit a fixed amount of money for a certain period.
- As per the bank policy, time deposits are non-withdrawable till maturity.
- Untimely withdrawal incurs penalties on the total amount.
- After the maturity period, the customer receives the total amount, including the principal and the interest earned.
- The interest earned from the deposit scheme depends on the bank, deposit tenor, and the amount deposited.
Why Banks Offers Time Deposit Schemes?
The following are the reasons why banks offer time deposit schemes to their customers:
- These deposit schemes offer cash flow that helps them to lend money to their customers.
- Banks earn profit at a higher interest rate by lending funds through time deposit schemes.
- Investing funds from a time deposit scheme in other securities offers a higher return to the bank than it does in paying the customers.
Types of Time Deposit Options:
There are mainly two types of time deposit schemes available and those are:
- Fixed Deposit (FD): This is one of the time deposit schemes, where depositors can deposit a lump sum amount for a fixed duration. This is also known as reinvestment deposit as the interest earned can only be accessed after maturity. The funds under this deposit scheme cannot be withdrawn and are non-negotiable, non-checkable, and non-payable on demand.
- Recurring Deposit (RD): Under this scheme, customers need to deposit a fixed amount every month. This deposit scheme enables depositors to deposit a pre-defined amount at a fixed interval for a long duration.
FAQs on Time Deposit
- What is a five-year time deposit?
A five-year time deposit account is a deposit account that holds the fund for five years and yields interest at the market rate. The interest offered on these time deposit schemes is higher than the short-term deposit schemes.
- Is a time deposit a good investment?
Yes, time deposits are a good investment option for those looking for high interest rates on their savings rather than on savings account. However, time deposits come with different deposit tenures that impact the interest rate and charges penalties on premature withdrawals as well.
- What is demand deposit vs. time deposit?
Demand deposit schemes are those that enable depositors to withdraw their fund without any prior notice or incurring any penalties on the fund. While time deposit schemes do not allow premature withdrawals before maturity without any penalty.
- Is time deposit an asset?
Whether a time deposit is an asset or not depends on the duration of the time deposit, such as an FD. An FD of tenor one year is a current asset, while FD of tenor more than one year is a non-current asset.
- Is time deposit taxable?
Yes, the interest earned on time deposit, such as Fixed Deposit (FD) is treated as Income from other sources and is taxable as per the Income Tax Act, 1961.
- What are the benefits of time deposit?
Time deposit is a risk-free investment option that is protected by the Deposit Guarantee Fund and also offers fixed income throughout life, thereby making it beneficial for the depositors.
- What is an example of a time deposit?
One of the most common examples of time deposit is certificate of deposit, also known as CD. CDs do not allow withdrawal without penalty unlike the demand deposit, where the depositors can withdraw money.
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