What is A Term Deposit?

Quick Summary

• A term deposit is a low-risk investment where you deposit a sum of money with a bank or an NBFC for a fixed period (tenure) in exchange for a fixed interest rate. It’s designed for investors who prioritize the safety of their capital and seek returns that exceed those of a standard savings account.
• The primary advantages are predictable returns, making financial planning straightforward, and a high degree of safety compared to market-linked investments like stocks. They offer stability to a financial portfolio and allow your money to grow through the power of compounding interest with minimal effort.
• There are different kinds to suit various saving habits. Fixed Deposits (FDs) are for a one-time, lump-sum investment. Recurring Deposits (RDs) allow you to invest a fixed amount every month. Special Term Deposits may offer unique benefits like higher interest rates for senior citizens or tax-saving options.
• Before opening a term deposit, it’s crucial to compare interest rates and choose a tenure that aligns with your financial goals. Be aware of penalties for premature withdrawal and remember that the interest earned is taxable according to your income slab. 

Invest Smartly with Mahindra Finance!

Invest Now

Invest Now

Meet Rajesh, a 28-year-old transporter from Haryana who recently received a long-pending payment of ₹2 lakhs from a client. He didn’t need the money for the next 15 months. Like many young people, he wanted to invest it. But he thought: What if I invest it in stock markets and right before I take it out, the market falls? After consulting with his father, who had been investing in term deposits for decades, Rajesh decided to invest in a financial instrument that offered him a good balance of safety and returns without the sleepless nights that market volatility brings.

A term deposit is a financial product where you deposit a specific amount of money with a financial institution, typically a bank or an NBFC (Non-banking Financial Company) for a predetermined period at a fixed interest rate. Unlike savings accounts where you can withdraw money anytime, term deposits may require you to keep your money locked in for the agreed duration (early withdrawals might attract additional charges), typically ranging from 7 days to 10 years. In return for this “locked” duration, financial institutions offer higher interest rates compared to regular savings accounts.

How Term Deposits Work

Term deposits are straightforward to understand: You lend your money to a financial institution for a specific period, and they pay you a fixed interest. There are three key elements in a term deposit: The principal amount, the interest rate, and the tenure.

The interest calculation in term deposits follows either simple interest or compound interest formulas. Most term deposits use compound interest, where your earnings generate additional earnings over time. For instance, if Rajesh invests his ₹2 lakhs at 6.75% annual interest with Mahindra Finance, the total amount at maturity will be ₹2.17 lakhs. Or, if he chooses a monthly interest payout, the total interest he will earn will be ₹16,375 (Since his interest won’t compound. This also causes his return to drop to 6.55%). 

The tenure might be the most defining characteristic of term deposits. During this time, your money remains with the financial institution, and premature withdrawals typically attract additional charges. This might seem as a restriction at first. However, you can view this as a blessing because it stops you from impulsively spending your money and lets it grow uninterrupted. 

Benefits of Investing in Term Deposits

Term deposits offer several compelling advantages that make them attractive to different types of investors, and their needs. 

1. The primary benefit is the predictable nature of returns. You know exactly how much money you’ll receive at maturity, making financial planning significantly easier.
2. Safety is another major advantage. While no investment is completely risk-free, term deposits are generally considered safer than equity investments or mutual funds.
3. The power of compounding. Cumulative term deposits let your interest earn interest. This means your money grows at a faster rate.
4. Term deposits add stability in your financial portfolio. 
5. Term deposits are one of the most convenient forms of investment. Once you’ve opened a term deposit, it works quietly in the background, growing your wealth without demanding your attention, unlike active investment portfolios like stocks. 
6. Easy to renew. Most institutions provide online access to track your investment’s progress and even offer automatic renewal options. 
7. Term deposits also offer better returns compared to traditional savings accounts.

While savings account interest rates typically hover around 2.5-4% annually, term deposits can offer 6-8% or even higher, depending on the institution and tenure chosen. This difference compounds significantly over time, making term deposits an attractive option for parking surplus funds.

Safety represents another major advantage, particularly when dealing with established institutions.  Banks offer additional security through DICGC insurance, while reputable NBFCs maintain strong credit ratings and regulatory compliance to minimize risk.

Suggested Read: How Fixed Deposit Can Safeguard Your Retirement Funds

Types of Term Deposits

Fixed Term Deposit

Fixed term deposits are one of the most popular term deposits. You invest a lump sum amount for a specific period at a predetermined interest rate. The interest rate remains constant throughout the tenure, regardless of market fluctuations. These deposits typically require minimum investments starting from as low as ₹1,000. It’s a great option for all income groups. 

Banks typically have tenures starting as low as 7 days. NBFC tenures might be a minimum of 12 months. Generally, tenures less than 12 months have lower interest rates. 

Recurring Term Deposits

Recurring term deposits work differently compared to fixed deposits. their fixed counterparts. Instead of investing a lump sum, you deposit a fixed amount monthly for a predetermined period. This systematic approach helps build financial discipline while growing your savings gradually.

The interest calculation in recurring deposits differs slightly, as each monthly installment earns interest for different periods. The final maturity amount is total of all monthly deposits plus their respective cumulative interest earnings. This type is great for salaried individuals who can set aside a fixed amount monthly but don’t have large sums for lump-sum investments.

Special Term Deposits

Special term deposits are deposits with a little “extra” like promotional interest rates or they have unique features. For instance, senior citizens might get higher interest rates, deposits during festivals or special occasions might have higher interest. Some deposits may have flexible interest payout options.

Some institutions offer sweep-in facilities where excess funds from your savings account automatically move to term deposits, optimizing interest earnings. Others provide tax-saving term deposits that qualify for deductions under Section 80C of the Income Tax Act, combining wealth creation with tax planning.

Factors to Consider Before Opening a Term Deposit

1. Both banks and Non-Banking Financial Companies (NBFCs) offer term deposits, but there are important distinctions to understand. Bank term deposits are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) up to ₹5 lakhs per depositor per bank, providing an additional safety net. NBFC term deposits, while not covered by DICGC insurance, often offer higher interest rates and may have more flexible terms and conditions. While choosing an NBFC, you have to consider the institution’s reputation, financial stability, and service quality alongside interest rates. This is where a brand like Mahindra Finance holds an edge. It scores high on all the above parameters.
2. Interest rates significantly impact your returns, making rate comparison crucial before investing. Different institutions offer varying rates, and even small percentage differences compound substantially over time. 

1. Tenure selection requires balancing your liquidity needs with return expectations. Longer tenures typically offer higher interest rates but reduce flexibility. Consider your financial goals, emergency fund requirements, and potential cash needs before locking your money for long periods. 

1. Premature withdrawal charges can dent your returns if you need funds before maturity. These charges are different for different institutions. They can involve interest rate reductions or a flat charge. Understand these terms beforehand. Withdraw your money only for emergencies. 

1. Tax implications also deserve consideration. Interest earned on term deposits is taxable as per your income tax slab. TDS (Tax Deducted at Source) is applicable if annual interest exceeds ₹50,000 (₹1 lakh for senior citizens). This TDS comes into force after calculating your interest earned across all accounts. Suppose you have a term deposit with Mahindra Finance, and another one with your bank. You earn ₹27,000 interest from each institution. Your total interest earned is over ₹50,000 and TDS will be deducted. People often assume that the ₹50,000 limit is for each deposit. Factor in post-tax returns when comparing investment options.

How to Open a Term Deposit

Opening a term deposit has become increasingly convenient with multiple channels available. Online platforms like Mahindra Finance offer the quickest route. They provide user-friendly websites and mobile applications where you can compare rates, select tenures, and complete applications within minutes.

The documentation process typically requires identity proof (Aadhaar, PAN card, passport), address proof, and photographs. Existing customers of the institution often enjoy simplified processes with pre-filled forms and faster approvals. New customers might need additional verification steps, but most institutions complete the process within 24-48 hours.

If you prefer personal interaction, you can visit a branch. Executives can explain various options, clarify doubts, and guide you through the application process. This approach particularly benefits first-time investors or if you have a substantial amount to invest. 

Today, you can open deposits, track performance, and even set up automatic renewals from your smartphone. Many institutions offer exclusive online rates or promotions, making digital channels increasingly attractive.

Conclusion

Term deposits from reputed institutions have served as reliable financial instruments for Indian investors seeking stability and predictable returns. 

Whether you’re a conservative investor prioritizing safety or someone seeking slightly higher returns with more manageable risk, term deposits offer options to suit various preferences.

While they may not offer the excitement of equity investments or the liquidity of savings accounts, their role in a financial portfolio remains undeniable. For individuals like Rajesh, term deposits provide the perfect starting point for growing their wealth systematically.

Successful financial planning involves diversification. Term deposits can form the stable foundation of your portfolio while you explore other investment avenues for long-term wealth creation.

Suggested Read: Fixed Deposit Vs Savings Account: Where Should You Invest?

FAQs on Term Deposits

What is the minimum amount required to start a term deposit?

The minimum amount varies by financial institution. Many banks allow you to open a term deposit with as little as ₹1,000, while others might have a slightly higher requirement. It’s always best to check directly with the specific bank or NBFC.

Can I withdraw money from a term deposit before maturity? 

Yes, you can withdraw your money before the maturity date, but it usually results in a penalty. The financial institution may reduce the interest rate payable on your deposit for the period it was held. This is known as a premature withdrawal.

How is the interest on a term deposit calculated? 

Interest is calculated based on the principal amount, the interest rate, and the tenure.

Are term deposits insured? 

Term deposits with banks are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC) for up to ₹5 lakhs per depositor, per bank. However, term deposits offered by Non-Banking Financial Companies (NBFCs) are not covered by this insurance. While choosing an NBFC for depositing your money, always check the credit rating of their term deposit schemes from rating agencies like CRISIL and India Ratings.

Can I have multiple term deposits simultaneously?

Yes, you can have as many term deposits as you like. You can open multiple deposits with the same institution or spread them across different banks and NBFCs to meet various financial goals.