Primarily, banks offer two Deposit Accounts, Demand Deposits like Current and Savings Accounts and Term Deposits, like Fixed or Recurring Accounts. When you open a Deposit Account, you become a depositor. The interest offered on Term Deposits is higher than on a Saving Account.
A Fixed Deposit holds money for a fixed period. In return, the bank pays interest on it. However, you cannot withdraw your money before the fixed duration expires. For example, if you hold a deposit of Rs. 10,000 for five years, the bank pays you an interest of 3% to 10% per annum, depending on the current rate.
Why are they necessary?
Maintaining Term Deposits is ideal for creating an emergency corpus and saving for the future. Since the returns are not market-oriented, you will receive fixed returns throughout the tenure. Those holding a Bank and Deposit Account can remain carefree about the future since their income keeps flowing. Here are some reasons:
Security
Keeping money in an FD Account is wiser than stacking it under your mattress or cupboard. It is a secure way to invest and gives you easy access to cash. Allowing your money to earn interest at a higher rate and tracking it online gives you the power to be independent. However, you can encash the amount before maturity in an emergency. Banks may provide a lower interest in that case.
Earning returns
Storing money in a deposit vault at home does not attract interest. Instead, if you invest it in a Deposit Account with the bank, your funds earn interest. The amount of interest is not affected by market situations or economic inflation. You earn the returns at fixed intervals, guaranteeing an economically stable future. Meanwhile, a Recurring Deposit is ideal for planning short-term goals you wish to realise in the next one to three years.
These include saving for a down payment on your new home, paying for child’s education, renovating your home, saving up for a degree abroad, etc.
Saving habit
Maintaining Term Deposits help teach the saving habit from childhood. They are an investment tool allowing you to make lumpsum or regular payments and save money for the future. Remember to analyse your financial goals beforehand, as premature withdrawals attract a penalty.
Clubbed interest with income
The FD interest earned gets clubbed with your income and taxed as per the income slab. For instance, if you create it in the name of your spouse, the money deployed does not attract taxes, but the interest earned forms a part of your income and attracts taxation. Nevertheless, these options are still a safe investment and free from regular fluctuations.
Opening them
The best way to access these traditional investment instruments is to approach the bank and open them through the Banking app. You should enter the desired investment amount, link it to Savings Account, and open the Deposit Account.