Fixed Deposit vs Term Deposit

Firstly, there can be no comparison between term and fixed deposits as the two are the same. However, the names are often used interchangeably by different individuals and entities. For instance, banks typically refer to an FD as a term deposit, while consumers use the term fixed deposit. Moreover, in countries like Canada, New Zealand, and Australia, Term Deposit is a popular term for investment instruments like FDs; in India, on the other hand, the use of the word fixed deposit is more prevalent.

FDs, aka term deposits, come with the following features:

• FDs are offered by banks and Non-Banking Financial companies (NBFCs).
• FDs require you to put a lump sum money for a fixed tenure of typically seven days to 10 years. 
• The interest rate for FDs varies from one bank to another and is based on your investment tenure. Typically, interest earned is higher than a savings account. 
• The return on investment is compounded periodically (monthly, quarterly, half-yearly, or annually).
• The rate of interest offered to senior citizens is higher. 
• To save taxes on your FD deposits, you can sign up for tax-saver FDs, which come with a lock-in period of 5 years. After subscribing to this plan, your investments will be tax-deductible under Section 80C of the Income Tax Act, 1961.
• You can re-invest for another term on maturity.
• You can avail of loans or credit cards against your FD corpus.
• While you are allowed to withdraw prematurely, a penalty will be levied.

There are multiple parameters to consider before choosing a fixed or term deposit. Your decision must be based on your financial needs, goals and cash flow needs. Consider the following factors when selecting a term or fixed deposit:

• Minimum Deposit Requirement
  The minimum amount to open a fixed deposit varies between Rs.1000 to 5000. So, consider your finances before investing in an FD.
   
• Cumulative or Non-Cumulative FDs
  There are two types of FDs – cumulative and non-cumulative. The cumulative FD, also known as Special Term Deposit, means that the interest is not paid at a regular frequency. Instead, it is reinvested, and you receive the entire interest income on maturity. On the other hand, a non-cumulative option means that you have chosen to receive interest payouts monthly, quarterly, half-yearly or annually, as per your needs.
   
• Maturity time-frame
  You can open a fixed deposit with a minimum and maximum tenure between seven days and ten years, respectively. Typically, a longer term also comes with higher interest. For instance, the post office time deposit offers a 6.9% interest rate for one, 7% for two and three years, and 7.5% for five years. Choose based on your ability to commit to a specific time frame.
   
• Premature withdrawal
  Banks and NBFCs vary when it comes to early withdrawal policies. Some banks charge a penalty on the interest, while others will merely reduce the interest amount. It is best to understand the terms and conditions in detail.
   
• Collateral for loan
  Your fixed deposit can be used as collateral for securing a loan. Banks typically allow a loan between 85 and 95% of the fixed deposit corpus. Understand the applicable interest rates and the principal amount you are eligible to use as collateral before applying for a loan.
   
• Taxation
  A tax-saver FD will be ideal if you want a tax benefit. Deposits of up to Rs.1.5 lakhs made to this scheme are tax-deductible under Section 80C of the Income Tax Act, 1961. However, the lock-in period for this FD plan is five years.

When funds sit idle in your savings account, you are tempted to withdraw them and spend. Hence, a fixed deposit is an effective way to inculcate a saving habit and earn guaranteed returns. Moreover, the funds earn interest, which continues to compound for the tenure of the deposit. To ensure that your FD continues to generate an income, renew it on maturity.

Hope this article has been able to decode the terms fixed and term deposits so that next time you visit a bank or post office, you don’t spend time comparing term deposit vs fixed deposit. Since both are the same instruments, if required, explore other investment schemes and weigh them against a fixed deposit to decide which one suits your spending appetite and fund requirements.