What is Term Deposit (Time Deposit) Account – Its Benefits and How to Apply
The phrase “time deposit,” also used to refer to “term deposits,” describes a bank account with a set maturity and interest rate. One typical example is the certificate of deposit (CD), which is a savings account with a lock-in period.
A time deposit account prevents early withdrawals of the deposit. You must wait until the term is through to get access to the money or pay a fee for early withdrawal. Read on to know every other detail about time deposit accounts.
How Does Time Deposit Work?
A time deposit blocks the amount of money for the duration of the deposit. Banks provide depositors the freedom to invest their money for terms ranging from seven days to ten years.
The length of time the funds are deposited with the bank determines the interest rate on the deposit. The money cannot be withdrawn by the depositor prior to the payment due date. Some banks provide the option for premature withdrawal, although the interest rate is lower.
The interest rate on time deposits might change depending on factors like the bank, the maturity date, and the amount invested. Additionally, interest rates even vary inside banks among accounts. In contrast, it is clear from comparing the interest rates of various investment options that term deposits offer higher rates than some savings accounts and lower rates than securities like bonds.
The principal and interest are credited to the depositor’s bank account on the day of maturity by the bank. Therefore, before making a choice, you must understand the type of investment and its benefits and analyse how long you want to commit the money and what are your overall financial goals.
Features of Time Deposit Account
- Fixed-date Withdrawal (Maturity Rate) – The rate of time deposit Interest is fixed and is not subject to fluctuations in the market.
- Safety of Investments – Since interest rates of the time deposit are not affected by the changes in the economy, it is one of the safest investment options available.
- Wealth Generation – The steady interest on the investment guarantees that the investors’ wealth increases even when the market is unstable.
- Rollover – If an investor does not need their money at the maturity of their time deposit, they can roll it over for a new term. The term ‘rollover’ refers to the reinvestment of maturity proceeds in a new time deposit and the addition of interest. As a result, an investor is not required to use their money as soon as the time deposit matures.
- Loan Against Deposit – In case the investor is in need of liquidity, they can seek a loan of up to 60-75% of the deposit amount.
- Taxation on Time Deposit Interest – Time Deposit Interest income can be taxable under the Income Tax Act and can be subject to a Tax Deducted at the Source (TDS).
- Low Investment Limit – The lower threshold of investment varies for each financial institution, but the lower limit is generally Rs 1,000. However, there is no upper limit on how much can be invested in term deposits.
- Penalty on Premature Withdrawal – Term deposits are considered ‘locked-in’ because they have a fixed tenor. If the investor chooses to withdraw from the deposit before the lock-in period expires, they must pay a penalty to the financial institution as well as lose interest income.
Types of Time Deposit
The term used to describe time deposit varies depending on the financial institution. Certificate of Deposit (CD), term deposit, or fixed deposit are all terms that are commonly used. Furthermore, in some countries, post offices offer investment vehicles such as Post-Office time deposit Schemes.
1. Fixed Deposit
A fixed deposit scheme requires a single large sum to account for a fixed tenure. The customer will be unable to access the fixed deposit until the maturity period has been completed. As a result, they are non-negotiable and non-payable on demand. A reinvestment deposit is one in which the interest earned is only accessible after maturity.
2. Recurring Deposit
A recurring deposit account allows the customer to deposit a fixed amount at regular intervals throughout the maturity period. For instance, a predefined amount is deposited monthly for a long period.
How to Open a Time Deposit Account
The application process for a term deposit is similar to that for a savings account. In fact, if a potential investor wants to open a term deposit at a bank where they already have a savings account, the process is sped up. The majority of banks and other financial institutions have made online provisions to apply with a time-saving verification process. It should be noted that the eligibility criteria rolled out by these institutions may differ, so before applying for a plan, one should check the necessary parameters.
- One can also opt to apply for a time deposit online through the steps mentioned (could vary with each bank)
- The applicant needs to have an active net banking feature and a valid PAN
- Once the user logs into his net banking portal, he gets access to the list of online services provided by the bank
- Applicant can select the option of creating time deposit from the services
- This is followed by entering details about one’s account and nominee details
- The next step would be entering the amount that would be parked for the time deposit account
- The investor needs to analyse the interest to tenor ratio before deciding the time deposit
- If the request is successfully created, an account is created ideally within 1-2 business days
Advantages of Time Deposit Account
- Time deposits are low-risk investments
- Time deposits enable you to make money in any market conditions
- In terms of tenure, time deposit provides more flexibility. Tenure options for time deposit with banks and other financial organizations range from seven days to ten years
- Loans against deposits are a crucial feature included with time deposit that let you apply for pre-approved loans against your holdings
Disadvantages of Time Deposit Account
- Returns offered by time deposit are lower than conservative investments
- Fixed interest rates do not generally beat the inflation rate
- An early withdrawal attracts a penalty
- In case interest rates rise, the investor loses the opportunity to invest elsewhere
- Usually, treasury bills and bonds have a greater yield than time deposit interest
Time Deposit vs Demand Deposit vs Fixed Deposit
Some people may have difficulty distinguishing between a time deposit and a fixed deposit. The critical issue is that different attributes are difficult to distinguish because they are essentially the same thing. Fixed deposits are, in general, a subset of term deposits.
A few financial institutions may distinguish between the two terms, but they will generally follow the same guidelines with only a few exceptions, such as the contract’s maturity.
A checking or savings account, for example, is not the same as a time deposit account. With checking and savings accounts, you can withdraw money “on demand” at any time. A money market savings account is another type of demand deposit account.
Any of these demand deposit accounts can meet your short-term and daily financial needs.
Time deposit accounts may be a better place to put your savings, particularly if you do not expect to need the money for an extended period of time. CDs, for example, typically pay a higher rate of interest than regular bank savings accounts, but you must ensure that you can leave your money in the time deposit account until the term expires.
Things to Consider When Choosing a Time Deposit Account
- Split your time deposit of similar tenure into smaller amounts
- Analyse your short-term and long-term goals while choosing the tenure
- Avoid opening the time deposits for long tenure
- Check the credibility of the financial institution
- Rate of penalty of premature withdrawals
Final Word
Time deposits are among the best investment tools because of the security and guaranteed returns they provide. However, it is best to assess your needs and then choose the fixed deposit that best meets those needs.
FAQs
Ans: A time deposit is a bank account that has a predetermined maturity date.
Ans: Usually, the time deposit interest rates vary between 2.5% – 7.5% p.a.
Ans: A Certificate of Time Deposit, CD is a fixed-income financial instrument governed by the Reserve Bank of India (RBI) that is issued in a dematerialized form. The pay-out amount is guaranteed from the start. A CD can be issued by any All-India Financial Institution or Scheduled Commercial Bank.
Ans: You can purchase a time deposit in any public or private bank
Ans: The minimum limit to open a time deposit account is usually Rs.1000 and there is no maximum limit
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This article has been prepared on the basis of internal data, publicly available information and other sources believed to be reliable. The information contained in this article is for general purposes only and not a complete disclosure of every material fact. It should not be construed as investment advice to any party. The article does not warrant the completeness or accuracy of the information, and disclaims all liabilities, losses and damages arising out of the use of this information. Readers shall be fully liable/responsible for any decision taken on the basis of this article.
