Term deposit: Meaning, Types, Interest Rates and features in 2022

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Choosing an investment option for your portfolio can be quite challenging. Not only do you have to decide the kind of investment scheme that you need to put your money in, but you also need to be aware of the different sub-categories within that type of investment.

Today, nearly every investment category has different sub-types and variants. Take equity stocks, for instance. There are dividend-paying stocks, large cap, mid cap and small cap stocks, and even value and growth stocks. In life insurance, which is another essential financial investment, you have different types like term plans, savings plans, Unit Linked Insurance Plans (ULIPs) and annuity plans.

Why, even term deposits come with their own different sub-categories! Wondering what term deposits are, and what variants they are offered in? Let's decode these details.

What is a term deposit?

A term deposit, also known as a fixed deposit (FD), is a kind of investment scheme that requires a lump sum, upfront investment. The sum is deposited for a predetermined period, which is why the scheme is called a term deposit. This period can range from 7 days to 10 years. Over this tenure, you will earn interest on your investment amount at a rate that is predetermined by the bank or the non-banking financial company with which you have your FD account.

For instance, say you invest Rs. 10 lakhs in an FD, for a period of 3 years. Your bank offers interest on FD at the rate of 5.4% per annum. So, at the end of this tenure, you will earn Rs. 1,74,587 as interest. This will bring your total investment value to Rs. 11,74,587.

This sums up the basic workings of a term deposit. Within this framework, there are different types of term deposits that are available in the financial market today. Let us take a closer look at these types of term deposits.

What are the different types of term deposits?

Based on what happens to the interest earned and other exclusive benefits and features, we have the following types of FDs or term deposits.

  • Regular FD

    A regular FD is a standard term deposit in which you can park your funds for tenures ranging from 7 days to 10 years or so. The minimum amount that can be deposited is generally Rs. 5,000.

    Here are some of the common features of a regular FD.

    • The rate of interest is predetermined.
    • The rate of interest is typically higher than savings account interest rates.
    • Regular FDs offer the option to avail a loan against the deposit, up to 90% of the amount in the FD.

    Best suited for:
    Anyone who has a lump sum amount ready to be invested in a safe investment option, and is looking for guaranteed1 interest thereon.

  • Tax-saving FD

    A tax-saving FD works much like a term deposit. That said, the defining feature of these FDs is that they offer tax benefits2 under section 80C of the Income Tax Act, 1961. The amount that you invest in a tax-saving FD is eligible for deduction from your total taxable income, up to Rs. 1.5 lakhs.

    Here are some of the common features of a tax-saving term deposit.

    • These deposits have a lock-in period of 5 years.
    • Loan and overdraft facilities are not available on these FDs.
    • Premature withdrawal of these FDs is not permitted.

    Best suited for:
    Anyone who has a lump sum amount to invest, and is also looking to save tax in the process.

  • Senior citizen FD

    Senior citizen FDs, as the name indicates, are term deposits that are exclusively for people over the age of 60. These term deposits work exactly like regular FDs, with one key exception. They offer higher rates of interest for senior citizens. Typically, the interest is marginally higher by around 0.50% per annum.

    Here are some of the common features of a senior citizen fixed deposit.

    • These deposits have a higher rate of interest than standard FDs.
    • Premature withdrawals are allowed, and may be subject to penalty.
    • Loan facilities are available, typically up to 90% of the amount in the FD.

    Best suited for:
    Senior citizens who want to earn guaranteed1 interest on their lump sum investment.

  • Cumulative FD

    Every term deposit earns interest, as you have seen earlier. In a cumulative fixed deposit, this interest is not paid out to the account holder during the tenure of the FD. Instead, it is reinvested back in the account, and only paid out at maturity. This means you will earn interest on your interest in cumulative FDs.

    Here are some of the common features of a cumulative fixed deposit.

    • These deposits do not offer any regular payout of interest.
    • The total amount of interest earned is typically higher in cumulative FDs than in non-cumulative FDs.
    • The interest earned on the deposit is paid out at maturity, along with the capital.

    Best suited for:
    Anyone who has a lump sum amount and wants to earn guaranteed1 compound interest on it, without the need for regular income payouts.

  • Non-cumulative FD

    A non-cumulative term deposit is one where the interest is not reinvested in the FD. Instead, it is paid out to the deposit account holder on a periodic basis. The payouts can be made on a monthly, quarterly, semi-annual or annual basis. This means you don't earn interest on your interest.

    Here are some of the common features of a non-cumulative fixed deposit.

    • These deposits offer regular payout of interest as per the frequency decided by you.
    • The amount you get at maturity does not include any cumulative interest.
    • The capital alone, along with the last interest instalment, is paid out at maturity.

    Best suited for:
    Anyone who has a lump sum amount wants to earn guaranteed1 income on a regular basis by investing that sum.

  • Flexi FD

    Flexi FDs are also known in some banks as sweep-in FDs. These deposits are linked to savings accounts. They earn interest at higher rates than savings accounts, but at lower rates than regular FDs. You can easily withdraw funds from your flexi FD into your savings account, or deposit any additional sum in your savings account into your flexi FD.

    Here are some of the common features of a sweep-in fixed deposit.

    • These deposits combine the liquidity of a savings account with the high interest rates of FDs.
    • You have the flexibility to choose the investment amount based on the amount in your savings account.
    • The deposit and withdrawal process are both simple.

    Best suited for:
    Anyone who has a lump sum amount and wants to earn higher interest on it, but does not want to lock the amount in for the long term.

  • NRI FD

    An NRI term deposit is a specific kind of FD that is designed exclusively for non-resident Indians. There are two main types of NRI deposits –

    • Non-resident external (NRE) FDs:
      This is for the funds that you earn outside India. You can make your NRE FD in foreign currency, and the interest earned thereon is not taxable in India.
    • Non-resident ordinary (NRO) FDs:
      This is for the funds that you earn in India, like your rental income from an Indian house property. You can make your NRO FD in the Indian rupee, and the interest earned thereon is taxable in India.

How to find the right term deposit for your needs?

Given that there are several types of term deposits, how do you figure out which one is the best option for you? Here are some pointers that can help.

Determine the eligibility and suitability

You may not be eligible for all kinds of term deposits. For instance, if you are a 35-year-old resident of India, that automatically rules out senior citizen FDs and NRI FDs. So, check out the types of term deposits you are eligible for to narrow down your options.

Compare interest rates

The goal of investing in a fixed deposit is to protect your capital and simultaneously maximise your interest. So, compare interest rates from different banks and shortlist the ones that offer competitive rates.

Decide what to do with the interest

Decide whether you want to reinvest your interest or receive it as regular payouts. This will help you choose between cumulative and non-cumulative FDs. If you do not want regular payouts, you can consider options like cumulative FDs or tax-saving FDs too.

Look for user-friendly processes

Look for a bank that offers a simple and easy account opening process. You don't want to be weighed down by tedious paperwork and application procedures. Also, ensure that your banking partner has a robust customer support system.

Conclusion

See how a seemingly one-dimensional investment option like a term deposit can give you so much variety? Each kind of deposit caters to a different kind of investor. So, understand your options and pick the kind of fixed deposit that best suits your needs. This way, you can ensure that your returns are optimised.

If you are still unsure, or if you are looking for something more, a life insurance plan like the ABSLI Fixed Maturity Plan may be just what you need. It gives you everything that a term deposit does – right from guaranteed returns up to 6.41%^ and single premium investments starting from just Rs. 12,000. In addition to this, you also get the benefit of a life cover, so you can rest assured that even in your absence, your family will be financially secure.

1 Provided all due premiums are paid.
2 Tax benefits are subject to changes in tax laws. Kindly consult your financial advisor for more details.
^ Scenario: Rs. 5,00,000 Single Premium. Male, Age 35, Plan Option A, Policy Term : 10 years
ABSLI Fixed Maturity Plan is a Non- Linked Non- Participating Individual Savings Life Insurance Plan (UIN: 109N135V01)
ADV/7/22-23/692

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