What is a Term Deposits - A Complete Guide

24 Jun 2022

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A bank account is the most crucial instrument that allows you to save money. You can easily deposit and withdraw funds at your convenience and grow your savings steadily. While banks offer interest on your savings account deposits, they also offer a host of investment facilities that allow you to earn better interest rates and grow your corpus significantly. One such facility is known as a term deposit. Let us understand what term deposits are and how to assess their salient features, exceptional benefits, and various types. Read on.

What is a term deposit account?

A term deposit account, also known as a fixed deposit account, is a type of fixed-term Investment avenue. You can use this account to deposit money into a financial institution like a bank and earn interest on your deposits. Such an investment typically comes with a fixed maturity date which ranges from one week to several years, and the interest rate you earn depends on your chosen investment term or tenure. Based on the type of term deposit you invest in; you may choose to receive the interest payment periodically or at the end of the investment term.

How term deposits work

Unlike a savings account, you cannot access funds in your term deposit account as and when you please. Instead, you must be willing to lock away your funds for the term and can withdraw them only when the deposit matures. That said, you may prematurely withdraw your term deposit, but the bank may levy a premature withdrawal penalty, which could be a specific percentage of the sums deposited.

Term deposit – The crucial facts you need to know

Term deposits have always remained a popular investment avenue for investors due to their various attributes. If you choose to invest in a term deposit, here are some facts you should be aware of to prepare yourself for the investment.

  • Fixed interest rate: Interest rates on term deposits are typically fixed based on the investment tenure, which means your investment is not subjected to market fluctuations.
  • Predetermined investment tenures: You can choose your preferred investment tenure, which could be anywhere from one to ten years. Remember that longer tenures translate to higher interest rates.
  • Interest payment: You may opt for interest payment on a non-cumulative, periodic basis, i.e., monthly, quarterly, semi-annually or annually. You may also opt for cumulative payment at the end of the investment tenure.
  • Rollover option: You may choose to automatically reinvest your term deposit at the end of the tenure at the new applicable interest rate. As such, you do not necessarily have to withdraw your deposit and create it all over again.
  • Insurance on deposits: Per RBI regulations, banks are mandated to insure your deposits of up to INR 500,000 for the principal and interest amount as on the date of liquidation or cancellation of the bank’s license.

Term deposit account features & benefits

Having explained term deposit meaning and facts, let us now analyse unique features and benefits of term deposit.

  • A term deposit is one of the safest investment instruments as there is no scope for capital erosion.
  • The bank repays your entire principal amount at end of the investment tenure.
  • You can opt for cumulative term deposits if you aim to create a safe but significant corpus.
  • You may also utilise periodic term deposits that enable you to generate an additional source of income by opting for monthly, quarterly, semi-annual or annual payments.
  • You can open a term deposit account with a low minimum amount (usually INR 100), and banks generally do not set a maximum amount for these investments.
  • You can obtain higher interest rates on your term deposit accounts if you choose longer investment tenures.
  • Per the Income Tax Act of India, you have to pay a tax deducted at source (TDS) on the interest earned on the deposit.
  • You can obtain loans of upto-75% of the term deposit amount if you need funds urgently.
  • Per RBI regulations, term deposits up to INR 500,000 are eligible for insurance coverage under the Deposit Insurance and Credit Guarantee Corporation.

Types of term deposits

Besides knowing what are term deposits and their salient features, you should be aware of the various types of deposits. They include the following:

• Cumulative deposits

A cumulative deposit is a type of term deposit that is ideal for investors who wish to achieve the goal of corpus creation. If you opt for the cumulative deposit option, the bank repays your principal amount and the accumulated interest as a lump sum when your term deposit matures. Also, cumulative deposits lead to higher interest and return rates since the returns accrued are reinvested.

• Non-cumulative deposits

Investors who wish to generate extra income over their existing income sources can opt for the non-cumulative term deposit that pays interest periodically. If you select this option, the bank deposits the interest income into your account on a monthly, quarterly, semi-annual or annual basis, depending on your chosen payment tenure.

• Tax-saver term deposits

Tax-saver term deposits are ideal for investors who wish to make the most of tax deduction benefits offered under Section 80C of the Income Tax Act of India, 1961. Under this facility, you can avail of tax deductions of up to INR 150,000 on your term deposit accounts. Note that your tax-saver term deposits come with a fixed lock-in period of 5 years, and you get tax exemptions on interest income up to INR 40,000 per annum.

The Baroda Tax Savings Term Deposit Account

  • Ideal for long term investments
  • Open the deposit with a minimum investment amount of INR 100 and in multiples of INR 100 thereafter
  • The minimum investment duration is five years, whereas the maximum duration is ten years
  • Senior citizens can get beneficial interest rates on Bank of Baroda term deposits.

• Sweep-in facility term deposits

Banks provide a facility that enables their account holders to set an upper limit on their savings bank accounts. If you deposit more funds than the upper limit you’ve set, the bank automatically converts the extra funds into a term deposit and provides interest on it. This is known as a sweep-in facility term deposit. If your savings account faces any deficit, you can withdraw funds from the term deposit. In such a case, you would only lose interest on the funds you sweep in.

• Senior Citizens Term Deposit

If you are above the age of 60 years, you can opt for the senior citizen citizens term deposit. This facility allows you to earn a slightly higher interest rate (usually 0.50% more) than that offered to other term deposit account holders.

• Recurring Deposits

A recurring deposit is also a type of term deposit under which you must deposit a fixed sum in a recurring account at fixed intervals. Like with most other term deposit accounts, you can choose your preferred investment duration, with one year being the minimum term for such deposits. The bank pays you interest when your deposit matures.

Bank of Baroda term deposits

Bank of Baroda offers an extensive range of term deposit accounts to its wide customer base. As a Bank of Baroda customer, you can opt for short and long term deposits, lasting up to a year and over ten years, respectively. Here is a look at three of the most popular Bank of Baroda term deposit accounts.

The Baroda SUVIDHA Flexible Fixed Deposit Scheme

  • Earn attractive interest rates
  • Enjoy flexible withdrawal limits
  • Avail loans of up to 95% of the deposit value

The Capital Gain Account Scheme, 1988

  • Open deposits with minimum and maximum investment durations of 12 and 120 months, respectively
  • Assign nominees
  • Avail of tax exemptions under Section 54(F)(4)

How to open a Bank of Baroda Term Deposit?

Now you can open Bank of Baroda term deposit accounts from the comfort of your home. Simply sign up for our net banking services or download the Bank of Baroda mobile app to get started. Get competitive Bank of Baroda term deposit rates and reach out to our representatives for assistance on the best type of term deposit suited to your needs. You may also contact us on our toll-free number 1800 102 44 55 / 1800 258 44 55 or walk into your nearest Bank of Baroda branch for more details.

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