What is Term Deposit – How it works in India

Banks and post offices are offering different investment scheme for an individual to invest their ideal money to get higher return for future. In out previous articles we have discussed about Public Provident Fund, Fixed deposit and Insurance schemes.

Today in this article we will know what is term deposit and how it can be a great investment opportunity for individuals.

Term Deposit means depositing your money for a fixed period of time with a bank or financial institution which cannot be withdrawn before that fixed time period ends.

While purchasing a term deposit, the applicant agreed to the fixed interest rate and time period after which the money can be withdrawn. This type of deposit is also known as time deposit.

Such terms or period of time can be in the range of 6 months to 5 years with a predefined interest rate which does not change during that period of deposit.

By depositing money for a specific time period, you can get fixed rate of interest until term deposit’s maturity date is over. Because of its prescribed term, banks are able to invest customer’s money in higher gain financial instruments due to which customer gets higher interest rate in comparison to interest rate of a saving accounts.

Flexi version of term deposit

How term deposit works in IndiaRecently many banks like kotak, Axis and HDFC , have started offering high earning term deposit accounts attached to saving account.

With this facility, customer can create a term deposit account and link it to his or her saving account. As soon as money in your saving account reaches a specific limit, bank will automatically transfer the excess amount to the term deposit account for a period which may vary between 6 months to 5 years.

Whenever balance in saving account falls short of that fixed limit, money from your term deposit account will automatically get reversed swept into your saving account.

Money in term deposit account will get credited with the interest that is applicable to the specific time period for which it is kept. Money in saving account will get normal rate of interest that is applicable to saving account.

You can withdraw money out of term deposit account with an advance notice. Bank also charge you penalty for such withdrawal. However, if you are availing flexi version of term deposit then you have liberty of withdrawing money at your convenience with no penalty charges to your account.

Interest that you receive from your term deposit scheme is taxable and from which your bank will also be deducting TDS at the applicable rate.

Also Read: How my interest on saving account is taxable in India

Editorial Staff at Yourfinancebook is a team of finance professionals. The team has more than a decade experience in taxation and personal finance.