Term Deposits
Banks offer the following types of Term deposits:
- Fixed deposits [FDs]
- 2 in 1 accounts
- Recurring deposits [RD]
Fixed Deposits
FDs are repayable after the expiry of the specified term varying form 7 days to 120 months. Hence they are also known as term deposits. However, they are not as liquid as savings deposits. The rate of interest paid on FDs is higher than that of savings deposits. Normally, the longer the term of the deposit, higher is the rate of interest but a bank may offer lower rate of interest for a longer period if it expects the rate to dip in future.
Interest on FDs is paid after every three months from the date of the deposit. The customer has the choice to have the interest reinvested in the FD account. In such a case, the deposit is called cumulative FD or compound interest deposit. For such type of deposits, interest is paid with the invested amount on maturity of the deposit at the end of the term. In case the customer wants interest to be paid every quarter, it is credited to their SB account or sent to them by cheque. This is nothing but a simple FD.
All types of entities can make FDs and the minimum amount of deposits specified by various banks varies from Rs. 1000 to Rs. 10000 with additional deposits in multiples as stipulated in that particular scheme.
Banks are supposed to deduct tax from the interest paid on FDs if the amount of interest paid to a customer at any branch exceeds Rs. 10000 in a financial year. This is applicable to both interests payable or reinvested per customer / per branch.
2 in 1 Account
Most of the banks have now come up with value added SB/current accounts and FD linked accounts. Such accounts are a combination of 2 schemes, mostly a running account like Current account or SB account which offers customers a flexibility to use the balance in FD accounts in times of any emergencies. Here, the depositor is able to enjoy both the liquidity and higher interest rate on FDs created out of the excess balance in running accounts. This product is called by different names in different banks, such as Money Multiplier, Super Saver Facility, Unlocked Fixed Deposit, and sweep in facility.
The following are the features of these 2 in 1 accounts:
- Auto Sweep Facility: offers maximum returns
- Reverse Sweep Facility: offers liquidity
- Auto Renewal Facility: offers ease
Recurring Deposits
Recurring Deposit [RD] accounts help individuals with regular incomes to save a fixed amount every month and at the same time earn interest at the rate applicable to FDs. It is quite similar to making FDs of a fixed amount. These deposits mature on a specific date in the future along with all the deposits made each month.
The contract between the customer and the bank is similar to the contract related to a FD. However, the balances in these deposits cannot be withdrawn till the date of maturity. Banks do permit premature withdrawals at a reduced interest applicable to the term of deposit but they deduct penalty for the same. TDS is not applicable to interest paid on RDs. This is a great attraction for customers since they get interest at FD rates without TDS
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