Time deposits are financial instruments where customers deposit their money for a specific period. In India, Time Deposits are offered by India Post and are similar to a fixed deposit account. A time deposit is for a time period of 1, 2, 3 and 5 years only.
Let’s know in detail about the time deposit types and more in this post.
|Minimum Investment Amount||Rs 1,000|
|Time Period||1, 2, 3 and 5 years|
|Interest Payment||1 year: 5.5%|
2 years: 5.7%
3 years: 5.8%
5 years: 6.7%
Calculated quarterly; Paid annually
What is a Time Deposit?
A time deposit is an interest-bearing financial instrument which is offered by India Post. This type of deposit scheme allows people to save their money for a specific period of time (1-5 years) and earn annual interest on the same.
This is the major difference between a time deposit and fixed deposit. Where fixed deposit can be made for 7 days to 10 years, it is only for 1-5 years in the case of a time deposit.
- Time Deposits earn higher interest than savings bank accounts
- In India, Time Deposits are provided by the India Post
- Time Deposits are for a fixed period of time
- Time Deposits are risk-free since they carry a fixed rate of interest
- Interest is paid annually in a time deposit
- Time Deposits are available for 1, 2, 3 and 5 years of periods
Features of Time Deposit
Time deposits and fixed deposits work in a similar fashion. Thus, their features and benefits also coincide. The following are some of the most popular features of time deposits:
- Income Tax Benefits: Under the time deposit, income tax benefits are available for 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 states that any individual under the age of 10 can open their time deposit. A guardian can also open a post office time deposit on behalf of a minor. Upon attaining the age of 18 years, ownership is transferred.
- Profitable returns: Interest is compounded annually, thus leading to good returns. The following are the latest time deposit interest rates offered by the India Post:
|Time Period||Interest Rate|
- 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.
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 the time deposit 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: You won’t be able to maximize your money’s earning potential if the interest rate is fixed. This factor is exactly the pro as well. That said, with a fixed rate of interest, You won’t be able to beat inflation in the long run.
- 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 considerably higher than what your time deposit account will yield in a single term.
Ask Yourself These Questions Before Investing in a Time Deposit
A time deposit account is a safe investment option but it only yields you the best results if you’ve thought it through. Ask these questions before you invest in a post office time deposit:
- 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 lock your savings for the entirety of the time deposit.
- 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. Check this fee in prior.
Types Of Time Deposits 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. Such accounts can be opened individually or as joint accounts. The minimum deposit is Rs. 1,000 (no upper ceiling) and currently, it fetches a maximum interest of 6.7% for a period of up to 5 years.
Post Office Recurring Deposit
With a recurring deposit, you are required to invest a specific amount of money every month. This amount is pre-decided. The current Post Office Recurring Deposit interest rate is 5.8% per annum. Minimum amount to be deposited is Rs 100 and can be increased in multiples of 10 thereafter. The is no maximum limit. Banks also provide the option to open a recurring deposit account as well.
Time Deposit vs. Fixed Deposit
It’s crucial to remember that there is no clear distinction between a time deposit and a fixed deposit. Consumers refer to these deposits as fixed deposits, whereas bankers prefer using the term ‘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.
There is only one difference between a post office time deposit and a fixed deposit account – the time period. As mentioned before, you can open a time deposit for a period of 1, 2, 3 and 5 years only whereas, it ranges from 7 days to 10 years in the case of a fixed deposit.
Documents Required to Open a Time Deposit
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 license, ration card and utility bills etc.
- Income documentation includes a recent three-month pay stub and a six-month bank account statement
To open a post office time deposit, obtain an Account opening Form or AOF. Now, fill it with your correct details and attach the asked KYC documents. Submit this AOF and deposit slip in the desired post office.
Time Deposit: FAQs
Section 80C of the Income Tax Act 1961 gives tax deductions of up to Rs. 1.5 lakh to investors who open a time deposit with a lock-in period of 5 years.
Before opening a time deposit, one needs to understand certain things like the interest rate and it’s payment frequency (does it match your expectations?) and the duration of time deposit (if you’re comfortable locking your money for this period).
TDS (Tax Deduction at Source) is applicable on the interest earned above Rs. 10,000.
You can add nominees to your recurring deposit amount to receive the investment in unforeseen circumstances.
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 investor receives a fine print containing the T&Cs.