Term Deposit Vs Fixed Deposit: Understanding The Key Differences
Term deposit and fixed deposit are two popular investment options offered by banks and financial institutions. While they may seem similar on the surface, there are some key differences between term deposit and fixed deposit, the two that investors should be aware of.
A term deposit is a type of deposit where the investor deposits a sum of money with a financial institution for a specified period of time. The interest rate on the deposit is fixed and is paid out to the investor at the end of the term.
A fixed deposit, on the other hand, is also a type of deposit where the investor deposits a sum of money with a financial institution for a fixed period of time. The interest rate on the deposit is fixed and is paid out to the investor at the end of the term. The key difference between the two is that term deposits are generally used for shorter periods (less than a year) while fixed deposits are used for longer periods (more than a year).
The interest rates offered on term deposits and fixed deposits may vary depending on the financial institution and the deposit amount. Generally, term deposits offer lower interest rates than fixed deposits. This is because term deposits are for shorter periods and therefore less risky for the financial institution. On the other hand, fixed deposits are for longer periods and are considered to be more stable, hence higher interest rates.
Penalty for Early Withdrawal
Term deposits and fixed deposits have a fixed tenure and the investor cannot withdraw the money before the maturity date without incurring a penalty. However, the penalty for early withdrawal may vary between the two. In general, the penalty for early withdrawal of a term deposit is higher than that of a fixed deposit. This is because term deposits are generally for shorter periods and therefore the financial institution incurs higher costs if the deposit is withdrawn early.
Term deposits and fixed deposits are not very liquid investments, as they have a fixed tenure and the investor cannot withdraw the money before the maturity date without incurring a penalty. However, term deposits are generally more liquid than fixed deposits. This is because term deposits have a shorter tenure and therefore the investor can access their funds sooner.
Term deposits and fixed deposits are available to all investors, including individuals, companies, and organisations. However, some financial institutions may have minimum deposit requirements for these investments.
The interest earned on both term deposits and fixed deposits is taxable under the Income Tax Act, and the tax rate may vary depending on the investor’s tax bracket. However, senior citizens may be eligible for a higher interest rate and tax benefits on fixed deposits.
In conclusion, term deposits and fixed deposits are two similar yet distinct investment options. While both provide fixed returns on investment and are considered to be safe and low-risk, the differences lie in the interest rates, penalty for early withdrawal, liquidity, and eligibility. Investors should carefully consider their investment goals, financial situation, and the specific terms and conditions of the deposits offered by various financial institutions before making a decision.