What are the Types of Term Deposits?

A significant section of the population in our country still depend upon term deposits for their investments, considering this to be the safest form of investment. Let’s delve more into the different types of term deposits.

A term deposit is an investment instrument in which a person can invest a lump sum amount for a fixed period. After maturity, the investor can withdraw the money along with interest earned on it.

It is a go-to investment option for almost every Indian as these term deposits offer assured returns along with the flexibility to choose the investment amount and the maturity period.

Generally, term deposits are available in two options – Fixed and Recurring Deposit. To understand what a term deposit is, you first need to know everything about its types.

Here is an explanation on these types of Term Deposits-

Fixed Deposit

The mechanism of a fixed deposit (FD) is simple. You choose a bank that offers the highest interest rate, invest a lump sum amount, and select a tenure. After the maturity period, the principal amount, along with interest generated, will be automatically credited to your bank account.

Furthermore, banks even offer sub-types of fixed deposit accounts such as-

• Regular Fixed Deposit

Regular FDs are the standard FD options, where you pick a bank and choose a term. Once the tenure ends, you receive the maturity amount. Senior citizens stand to gain even more with a fixed deposit as most banks offer a higher interest rate for seniors citizens.

• Tax-Saving Fixed Deposit

A tax-saving fixed deposit serves dual-purpose – it helps in increasing wealth and also helps in saving taxes. Under Section 80C, these deposit accounts allow you to get a tax deduction up to Rs. 1.5 Lakh. However, tax-saving fixed deposits have a lock-in period of five years.

• Sweep-In Facility

This facility allows people to link their fixed deposit account to their savings/current account. With the help of this feature, a person can set an upper limit on his/her account. Any amount above the stipulated amount will be moved to the fixed deposit. Vice versa, one can withdraw money from the fixed deposit in case of emergencies.

Recurring Deposit

Another popular term deposit option is a recurring deposit (RD). With a recurring deposit, individuals don’t need to invest a lump sum amount. Instead, they can make periodical investments. This term deposit is especially beneficial for individuals who don’t have a lump sum to invest.

A recurring deposit can be opened for a tenure ranging between 6 months to 10 years with a minimum amount of Rs. 100, which varies according to your banks.

You can even withdraw the accumulated amount before the maturity. However, you will have to pay the penalty for premature withdrawal.

While both the term deposits offer attractive benefits, there are some tax implications associated with them. The returns generated from FDs and RDs are considered to be earned income. Thus, the interest is taxable as per the prevailing tax slab rate. Also, you need to consider the TDS provisions applicable to RDs and FDs.

Savings account are the most conventional methods of saving money, and they have been around for a long time.