A term deposit is a fixed-term investment deposited into an account at any banking institution. It is also called a time deposit or certificate of deposit(CD). It is an interest bearing-bank deposit where you can keep your money safe within the stated period.
Term deposit usually carries short-term maturities from one month to a few years, which has a fluctuating level of required minimum deposits, and the funds can only be withdrawn after the term ends. Generally, the longer the time, the better the profit on the money.
The account holder may allow the investor for early termination or withdrawal of the funds if they give notification before, but there can be a risk of penalty for early termination. When an account holder deposits money at a bank, the bank has the authorization to use that funds to lend to businesses and other consumers.
On a term deposit account, the interest rate is slightly higher than that paid on a savings account. Click to know more because the access to money is limited for some time. It is an extremely safe investment and therefore seems very appealing to the consumers and low-risk investors. Term deposit sold by banks are protected by the Federal Deposit Insurance Corporation (FDIC) and National Credit Union Administration (NCUA) which provides insurance sold by credit unions.
Term deposit has unique financial features that have made them suitable among the investors. The features of Term deposit are:
- Fixed-Rate of interest- For term deposit, the rate of interest is fixed and are not subject to change in the market.
- Adjust Investment Period- The investors have the privilege to choose the tenure of term deposit based on the scheme offered by the financial institution.
- Loan against deposit- If in an emergency, the depositor needs financial liquidity, then they can avail loan up to 75% of the deposited fund.
- Low investment limit- There is no upper limit on how much you can invest in a term deposit, but the lower limit is Rs.1000 which may vary as per the financial institution.
- Insurance on Term deposit- Under the guidelines and regulations of RBI, any fund in a certified bank is eligible for covering insurance up to Rs.1 lakh.
Types of Term-deposit- There are types of term deposit based on their interest and monetary features.
- Non-cumulative and cumulative deposits- A non-cumulative term deposit is for investors who want a regular interest payout whereas cumulative deposits are made for investors who don’t need regular payout from the deposit and the interest is reinvested into the funds and paid out as a lump sum at the end of term-end.
- Short and Long term deposit- A short term deposit has a lock-in period which ranges from one to twelve months and provides quick returns with low-interest rates. Long term has a lock-in period ranges from one to ten years and provides a higher interest rate.
- Post-Office Term deposit- Post offices also provide facilities for some financial services, one of them is the Post-Office Time deposit. It can either be opened as a joint account or as an individual. One can easily transfer their term deposit accounts from one post office to another or can have multiple accounts in the same post office. The lower limit for the deposit is Rs.200 and the present interest rate is 7.9% for five years.
- Tax-saving term deposit- These type of tax-saver term deposit have a lock-in period of five years and any income above Rs.40,000 will be liable to tax under Section 80C of Income Tax Act.
In the end, whatever savings options you choose, make sure to compare different term deposit accounts with offers from various banks and financial institution to find the best deals to suits your saving goals.