Factors to Consider When Choosing a Term Deposit Account

When it comes to growing your savings, term deposits are a popular option that offers stability and capital preservation. There are two types of term deposits - Fixed Deposits and Recurring Deposits. However, to make the most of your investments, you need to consider several factors such as interest rates.

Tenure options, premature withdrawal terms, interest payment frequency, and tax implications, among others, in this article, we will delve into each of these factors to provide you with a comprehensive guide on how to choose a term deposit account that suits your financial needs.

Tips to Consider Before Opening a Term Deposit Account

 1. Interest Rate: Maximize Your Returns with the Term Deposit Account

When investing in fixed income instruments, the primary factor that piques investor's attention is the interest rate offered. It has a direct impact on your overall returns. All term deposits have varying interest rates based on deposit tenure. 

While some short-term deposits may come with higher interest rates, it's advised to stay invested for the long-term to generate higher overall returns upon maturity. However, if you have short-term goals, a term deposit with a shorter tenure could be more apt. 

Term Deposits interest rates like FD rates are calculated using the compound interest calculation method, where the accrued interest keeps earning interest. We have explained it here. Additionally, most banks offer additional interest rates for senior citizens. Consider these factors related to interest rate before opening a term deposit account. 

2. Tenure Options for the Term Deposit Account

Another important factor to consider when choosing a term deposit account is the tenure options available. Different schemes offer varying tenures, ranging from a few months to several years. For instance, FD tenure can range from 7 days to 10 years, whereas for RD, the tenure usually ranges from 6 months to 10 years. 

Then there are non-callable Fixed Deposits - FDs that come with a lock-in period, within which you're not allowed to withdraw the deposit amount. Evaluate your financial objectives and select a tenure that aligns with your specific needs. 

3. Term Deposit Account Premature Withdrawal Terms 

While fixed deposits are known for their stability, there may be instances when you need to withdraw your funds before the maturity date due to unforeseen circumstances. Some schemes allow partial withdrawals or early closures with reduced interest rates, while others have stricter conditions. Carefully review the terms and conditions to ensure that the scheme provides adequate flexibility in case of unexpected financial needs. 

For callable or regular FDs, you can opt for premature withdrawal. But a certain early FD withdrawal penalty could be levied. You can read more about the pros and cons of premature FD withdrawal here. 

4. Interest Payment Frequency of the Term Deposit Account

Term deposit accounts offer various options for interest payment frequency – monthly, quarterly, annually, or at maturity. The choice of interest payment frequency depends on your financial requirements and cash flow needs. If you rely on the interest income for regular expenses, selecting a scheme with a monthly or quarterly interest payment option may be more suitable. 

There are called non-cumulative Fixed Deposits. Such deposits offer a steady cash flow throughout the tenure of your investment and could be more suitable for senior citizens.

If you have the flexibility to reinvest the interest and don't require an immediate income stream, a scheme with an annual or at-maturity interest payment option might be more beneficial. This allows you to maximise your returns by reinvesting the accumulated interest until maturity.

5. Credibility of the Institution of the Term Deposit Account

When it comes to investing your hard-earned money, it's essential to consider the credibility and reputation of the institution offering the term deposit account. Look for for well-established banks like Ujjivan Small Finance Bank or financial institutions that are regulated by the RBI (Reserve Bank of India). 

6. Digital Banking Facility

In the last few years, banking has advanced by leaps and bounds. The focus on better customer experience and engagement has taken the forefront. Today, most banks offer digital banking services allowing you to bank from anywhere. This helps time and effort and enhances customer experience. Open a term deposit account with a bank that offers digital banking facility. 

7. Tax Implications: Optimise Your Term Deposit Account Returns

When investing in a term deposit account, it's crucial to consider the tax implications associated with the scheme. The interest earned from fixed deposits is taxable as per the prevailing tax laws in India. The minimum applicable TDS (Tax Deducted at Source) is 10% if the interest income exceeds ₹40,000 (for regular citizens) or ₹50,000 (for senior citizens). Please note that this TDS exemption on FD interest is applicable for FY 2024-25 (till March 2025). For FY 2025-26, the TDS exemption limit has been hiked to ₹50,000 for regular citizens and ₹1 lakh for senior citizens.

Evaluate the tax brackets and exemptions to understand the impact on your overall returns. Additionally, some term deposit schemes may offer tax-saving benefits under Section 80C of the Income Tax Act. You can learn more about Tax Saver deposits here..