Different kinds of financial instruments were created so that people could monetise their savings and earn passive income. To understand time deposit meaning, we need to understand the concept of the time value of money. The concept of money depreciating with time led to people realising that their savings are lowering if they are just lying around. Here’s where the concept of time deposit comes in. Time deposits are financial instruments where customers deposit their money for a specific period. The bank provides them interest on the deposit.
What Is a Time Deposit?
A time deposit is an interest-bearing financial instrument typically associated with a bank. It is a form through which the person making the deposit locks away a certain amount of money for a fixed period. Once the deposit is made, removing the money before the end of the fixed period will result in a small penalty and loss of interest the deposit might have generated; this is essentially what a time deposit meaning is.
This time deposit offers a higher interest rate than their regular savings account, thereby allowing an individual’s money to grow, which will be utilised later. Once the term of time deposit ends, the depositors can remove their money, use it or invest it elsewhere. They also have a choice of renewing their deposit for another term.
- Time Deposits earn higher interest than savings bank accounts.
- Time Deposits are often for a fixed period.
- Time Deposits are risk-free since they carry a fixed rate of interest.
- Tax Saving Tax Deposits help depositors earn tax-free interest.
- Time Deposits are available in long-term and short-term options.
Features of Time Deposit
Time deposits have unique features that make them a popular choice for investors. These are some of the most popular features of time deposits.
- Income Tax Benefits: Under the time deposit, income tax benefits are available for only a 5-year post office time deposit account. Investors under time deposits can claim tax exemptions of up to 1.5 lakh under section 80C of the ITA, 1961.
- Various Lock-in Periods: With a time deposit, investors can avail of lock-in periods for 1,2,3 & 5 years. However, this lock-in period can be extended by submitting a formal application to the post office.
- Eligibility: The most interesting feature of time deposits is their eligibility criteria, which state that any individual under the age of 10 can open their time deposit. Any guardian can also open the time deposit on behalf of a minor.
- Profitable returns: The rate of interest is satisfactory under a time deposit.
- The investors can choose to accumulate or disburse the interest: They can opt for accumulating it and getting it along with their deposit at the end of the tenure. Alternatively, they may opt to receive only the interest portion periodically, monthly, quarterly, or yearly. At the same time, the principal amount continues to earn interest.
How Does a Time Deposit Grow Your Wealth?
With time prices of commodities will increase due to inflation; why shouldn’t the same increment happen to our savings as well?
One pen, available for Rs. 10 today, might be worth Rs. 15 in a few years. Nothing about the pen changed, yet its price increased; things tend to get more expensive due to inflation. Therefore, if you save Rs. 10,000 and keep it in your wardrobe, in a few years, its value will decrease because you can buy lesser things from Rs. 10,000.
Here’s where the concept of deposit comes in. Banks created these financial instruments through which customers can deposit their savings with the bank. In exchange, they would earn a particular interest. These deposits provide liquidity to the banks, who can then lend this money and earn interest. Part of this interest is given to the customers.
Customers can deposit money into financial products called time deposits for a predetermined length of time. They receive interest on their deposits from the bank.
Pros and Cons of Time Deposit
Pros of time deposits: Time deposits are seen as an excellent way to start saving for the future. It is a great way for people to start their investment journey. Here are some of its advantages.
- Low risk: Since time deposits are not linked with market volatility, they carry lower risks of changes. A time deposit is perfect for investors with a low-risk appetite.
- Fixed term: It will be challenging to withdraw your money once you’ve deposited it in a time deposit account. Before withdrawing the deposit, you must wait for the account to mature. This will give you some time to think about future purchases that are worthwhile for your hard-earned money and to plan your future spending.
Cons of time deposits: Here are some of the cons of investing in time deposits
- You can’t earn more money with fixed rates: Investors won’t be able to maximise your money’s earning potential if it is fixed earnings-tagged. You are confined to earning less than 1% for 360 days on the buy-and-sell endeavour rather than being allowed to make up to 20% more.
- Lack of liquidity: The lack of funds to deal with monetary emergencies is one of the most prominent drawbacks of having a time deposit account. You may occasionally turn to borrow money at interest rates that are 10 times more than what your time deposit account will yield in a single term.
What To Consider When Choosing a Time Deposit Account
For every financial circumstance, time deposit accounts aren’t always the ideal option. Before establishing a time deposit account, such as a CD, there are several things to ask.
- What are your financial goals? If you can commit for a longer period of time, time deposit accounts could offer you a higher return. However, you must be certain that you are willing to commit to having your money locked up for several months or years. Standard bank savings or money market accounts can be a better option if you require rapid access to your savings.
- What if an early withdrawal fee must be paid? You might have to pay an early withdrawal penalty if you need to retrieve the money in your time deposit account before the predetermined term has passed. This fine can build up to a large amount of interest you had anticipated to receive on your money, depending on the bank or credit union and the period of your account.
Types Of Time Deposit in India
There are two main types of time deposits in India:
Post Office Fixed Deposit
Amongst the two types of time deposits, this one can be opened with a post office for 1 to 5 years. The tenure of the account can also exceed five years and will make the depositor eligible for tax benefits. Such accounts can be opened individually or as joint accounts. The minimum deposit is Rs. 200, and currently, it fetches an interest rate of 5.5% (1 to 3 years) and 6.7% (5 years).
Post Office Recurring Deposit
When a recurring account is opened with the bank, the depositor deposits a specific amount of money every month that the depositor has previously agreed to. One can open this time deposit with a minimum of Rs 200. The interest is earned according to the deposit. The tenure of such an account ranges from 6 months to 10 years, and the interest rate is usually between 3.5% to 5.5% per annum. Senior citizens are eligible for an additional 0.50% to 0.80% on all deposits. Such a type of time deposit inculcates the habit of regular savings in an individual. While one can avail of a loan against it, premature withdrawals are not allowed.
These time deposits may further be subdivided into:
- Short-term and long-term time deposits
These two types of time deposits are segregated depending on the tenure of the investment. In the short term, the lock-in period is between 1 to 12 months. This is suitable for people who are searching for quick returns. The lock-in period is 1 to 10 years in the long-term time deposit. The long-term deposit fetches a higher interest rate than a short-term deposit.
- Sweep in facility time deposit
This facility is offered to savings account holders wherein an upper limit for the account is set. Any amount more than that is automatically converted into a time deposit. A higher interest rate is given on this type of time deposit. However, suppose the account holder falls short of the balance in their savings account. In that case, money will be swept (transferred) from this time deposit back into the savings bank account with a loss of interest.
Time Deposit vs. Fixed Deposit
It’s crucial to remember that there is no distinction between a time deposit and a fixed deposit. Consumers refer to these deposits as fixed deposits, but bankers frequently refer to them as time deposits because they are made for a set amount of time. Both resources function in the same way. You must deposit a certain amount of money for a specific investment time. Additionally, both have the same tax advantages. Given that both names refer to the same thing, the dispute between time deposits and fixed deposits is undertaken in ignorance.
Even the government of India will ensure fixed deposits or time deposits through the Deposit Insurance and Credit Guarantee Corporation of India (DICGC). This means you are still entitled to receive your fixed deposit back even if the bank files for bankruptcy and must liquidate its assets. As a result, it is regarded as one of the safest investments to make and is still well-liked by all social classes.
A fixed deposit a lump sum of money is invested for a fixed period. It earns a specific rate of interest (which may be different for every bank). The minimum investment can be from Rs. 1,000 as well. It is a long-term investment (between 1 and 10 years). The depositor is eligible for a loan against it if they need immediate liquid funds.
How To Open a Time Deposit Account
When opening a fixed deposit account at a post office, the following paperwork must be provided:
- Identity documentation includes Aadhaar, PAN, and voter ID cards
- Address verification documents include a driver’s licence, ration card, utility bills, and a PAN card.
- Income documentation includes a recent three-month pay stub and a six-month bank account statement.
Both offline and online, customers can open a fixed deposit or time deposit account at any post office in India.
- Visit https://ebanking.indiapost.gov.in and log in with your User ID and Password to access your account.
- Click the “Service Request” link under the “General Services” section to continue.
- To submit a request for opening a TD account, click on “New Request” now.
- Now accurately complete the application form with all the necessary information.
- Make the first contribution and then press “Submit.”
- You will receive a confirmation alert on your registered email ID following a successful submission.
Now that you are well versed with the time deposit meaning consider investing in a deposit. Choose from a wide range of time deposits, from tax savings to high-risk benefits, and take advantage of your savings bank account funds. Time deposits make for extremely valuable, low-risk entries for a diversified portfolio. Do your research and understand the meaning of time deposit meaning before investing in time deposits. Remember that most time deposits aren’t extremely liquid assets, so only invest to your limits.
To help parents save up for their child’s future, many banks, financial institutions, and the government have developed many time deposit schemes for children. Such schemes are the “Shishu mangal” deposit, the “Balika Shiksha” scheme, etc. The government has also launched a “Sukanya Samriddhi account” for a girl child above ten years of age. When she grows older, she has financial stability.
Section 80C of the Income Tax Act 1961 gives a tax exemption of up to Rs. 1.5 lakh to investors who open a fixed deposit with a lock-in period of 5 years. Income above Rs. 40,000 in interest in one year is taxable.
Before opening a time deposit, one needs to understand certain things like:
– How much percentage are you expecting from your savings?
– How often is interest compounded in your account (daily, monthly)?
– What is the duration of the time deposit account?
– How much time are you willing to “lock in” your money for?
TDS (Tax Deduction at Source) is applicable on the interest earned above Rs. 10,000. Suppose the investor’s total income is lower than the taxable limit. In that case, they can furnish Form 15G/15H when opening an FD account to avoid tax deductions.
You can add nominees to your recurring deposit amount to receive the investment in unforeseen circumstances.
Yes, time deposits and fixed deposits are essentially the same things.
If necessary, the owner of a time deposit may withdraw the funds, but they may forfeit some or all of the promised interest and may be subject to penalties. When opening an account, the saver receives fine print that contains the terms.
A time deposit is one of the best investment alternatives for those looking for a reliable and secure return on their money. In time deposits, the amount is held for a predetermined amount, and the depositor is not permitted to withdraw the money until the term has expired.