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Short Term FD

Updated on: 21 Dec 2023 | 5 min read

Fixed Deposits are one of the most popular investment choices. You can deposit a fixed amount in a bank or NBFC for a specified period and earn interest. You receive the corpus (principle + interest) back at the end of the maturity period. All banks and many NBFCs offer FDs as an investment choice.

 

The deposited capital has almost no risk, and interest payment is nearly guaranteed. You can choose to receive interest payments monthly, quarterly, semi-annually, or annually.

Depending on the deposit period, FDs are classified as long-term and short-term. In this article, we will discuss all aspects of short-term FDs and their features.

What is a Short Term FD?

Banks and NBFCs offer short term fixed deposits as an investment tool to deposit a certain amount for a maturity period of less than one year. A predetermined fixed interest is paid on the deposit. You can choose to receive regular periodic interest or cumulative interest payments at the end of tenure. The deposit amount is repaid on completion of the maturity period. The deposit period (term) can be anywhere between 7 days to 12 months. The short-term FD interest rates offered vary from bank to bank.

Components of Short-term FDs

The components of short-term Fixed Deposits are as follows:

  • Tenure
    The tenor of a short-term FD ranges from 7 days to 12 months.
  • Short-Term FD Interest Rate
    The interest rates offered for a short-term FD varies from bank to bank. However, the rate of interest is lower than the long-term FDs but is typically more than the Savings bank account. Additionally, senior citizens are offered an additional interest above the base rate.
  • Investment Amount
    The investment amount for a short-term FD differs from bank to bank. For example, you can open an FD with as low as Rs. 1000 in a public sector bank, but for a private sector bank, it is Rs. 5000.

Features of Short-term FDs

The features of a short-term FD are as follows:

  • Tax: The interest income from short-term FDs is taxed per the provisions of the Income Tax Act 1961 provisions. A TDS of 10% is applicable on interest for PAN holders, and for non-PAN holders, it is 20%.
  • Loans: Short Term FDs can be pledged as collateral while availing loans. You can take a loan of value amounting up to 95% of the FD value. However, this may vary from bank to bank.
  • Renewal: You can withdraw your capital from the FD or choose to renew it at maturity. FDs usually come with an option of auto-renewal.
  • Maturity period: You can invest in a short-term FD for a period of 7 days to 12 months.
  • Interest payments: The FD interest rate usually increases with an increase in the tenure on account of holding period risk. The frequency of interest payment can usually be chosen and can be monthly, quarterly, half-yearly, or yearly. The rates vary from bank to bank, and you can choose to invest in the short-term FD that offers a higher risk-adjusted return. The interest rates are slightly higher for senior citizens.
  • Premature withdrawal: Banks usually charge a penalty on premature withdrawal from an FD. The amount of penalty charged varies from bank to bank. Some banks might not charge any penalty on an early withdrawal. 
  • Minimum and Maximum Amount: The minimum amount for opening an FD account is Rs.1,000 in most banks in India. However, this may depend on the institution chosen while making the investment. Some banks have a different minimum amount requirement for FDs booked electronically. There is no upper limit on the amount you can deposit in an FD.

Short-Term FD Interest Rates 2023

The following table shows short-term FD interest rates offered by some of the leading banks in India:

 

Name of the BankInterest Rates for General CitizensInterest Rate for Senior Citizens

Bank of Baroda

2.80% – 4.90%

3.30% – 5.40%

HDFC Bank

2.50% – 4.90%

3.00% – 5.40%

Kotak Bank

2.90% – 4.40%

3.00% – 4.90%

SBI Bank

2.90% – 4.40%

3.40% – 4.90%

Bank of India

3.25% – 4.75%

3.75% – 5.25%

Canara Bank

2.95% – 5.20%

2.95% – 5.70%

ICICI Bank

2.50% – 4.90%

3.00% – 5.40%

Axis Bank

2.50% – 5.15%

2.50% – 5.80%

**Disclaimer: Interest rates are subject to change per the bank’s policy and the prevalent repo rate.

Advantages of Investing in a Short-Term FD

You can choose to invest in short term FDs for the following benefits they offer:

  • Short-term savings: If you want to invest securely and save for short time horizons – e.g., to buy a vehicle, etc.,  short-term FDs are ideal.
  • Very Secure: Short-term FDs are largely unaffected by market fluctuations. The return on them is assured by the bank.
  • Avail loans: Short-term FDs can be used as collateral to avail loans of up to 95% of their value. There is no need for a guarantor if you use the FD as collateral.
  • Nomination facility: There is an option to nominate beneficiaries for the FD investment.
  • Emergency Withdrawal: The investment in an FD can be withdrawn before maturity if the needed. However, a small penalty is charged for an early withdrawal.
  • Liquidity: The term of less than one year makes your funds  liquid, and you can re-evaluate your investment options at the end of that period.

Eligibility for short-term FD

Any Indian resident is eligible to invest in a short term FD. Some banks offer this facility to NRIs as well. It is also possible for minors to invest in a short term FD with their legal guardians as custodians. Hindu Undivided Families (HUFs) can also invest in short-term FDs.

However, many banks usually ask you to have a savings account with them, so that it is easy for them to credit your interest payments to your account.

How to open a short-term FD account

The process to open a short-term FD account can differ among various banks. Many banks typically require individuals to open a savings account and a short-term fixed deposit account. This option can streamline receiving interest, as the accrued amount can be directly transferred to your savings account.

Additionally, it's important to note that the eligibility criteria for account holders may vary. Generally, banks make it mandatory for the account holder to be a resident Indian. However, some banks may extend the option for Non-Resident Indians to open a short-term fixed deposit account.

To initiate the process of opening a fixed deposit, you must submit essential documents such as identity proof, passport-sized photographs, and address proof.

Final Thoughts

Fixed deposits have traditionally enjoyed a lot of trust among Indians. With their assured fixed returns and ease of availability, fixed deposits remain the first choice for short-term investment. Furthermore, the hassle-free process is another factor why people choose to invest in short term FDs. You must evaluate all available instruments and choose the one that meets your needs.

FAQs

What is the taxation on short-term FDs?

The income from short term fixed deposits is taxed as per the provisions of the Income Tax Act, 1961. According to this, all the interest earnings above Rs. 10,000 are taxed as per your current income slab. The exempt amount of Rs. 10,000 is for all the interest earnings combined from different sources like deposits and savings accounts.

What is the minimum tenure for short-term FDs?

The minimum tenure for short-term FDs is seven days.

Can NRIs open short-term FD accounts?

Banks usually offer short-term FDs only to Indian residents. Some banks, however, do provide short term FDs to NRIs. The currency of deposit, taxation and whether it is repatriable, however, differ based on the type of account – NRE or NRO.  NRIs having a foreign income and looking to invest in FDs in India can invest through an NRE fixed deposit. NRIs earnings in India can be invested in FDs through an NRO account. These earnings can include rent, pension, etc.

How should I choose between a short-term FD and a long-term FD?

Long-term FDs offer higher interest rates. Therefore, if you are okay with locking in your amount for a longer duration, you should go for a long-term FD. Else, it would be better if you opt for a short-term FD.

Can I lose money in a fixed deposit?

There are two potential risks to investing in an FD. Interest rate risk means you will lose the notional returns you could have obtained with rising interest rates. The second is the risk of the bank defaulting. One safeguard here is that deposits of up to Rs. 5 lakhs are guaranteed by Deposit Insurance and Credit Guarantee Corporation (DICGC).

Is a short-term fixed deposit good?

Yes, investing in a short-term Fixed Deposit is safe as it provides liquidity, and the interest rate is also lucrative.

Can I do a short-term FD for 10 days?

Yes, you can do a short-term FD for any time ranging from 7 days to 12 months

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