What is Term Deposit & How Does it Work?

Term Deposit Interest Rates 2025

The rates of interest offered by various financial institutions differ according to the tenure of the investment and their company policy.

The following table illustrates the highest rates of interests offered by the banks in India (in alphabetical order):

*Above Interest rates are for deposit amount less than Rs.2 crore.

The latest available data indicates that IDFC Bank and Ratnakar Bank offer the highest rates of interest on term deposits. The interest rates spelled out for the senior citizens tend to be higher than that offered to the general public. However, certain banks do not provide higher rate of interest for senior citizens who have not opted for domestic term deposits.

Characteristics of the Term Deposits/Time Deposits

Term Deposits harbour a unique set of monetary features that make them a favoured form of investment among the general public.

The essential characteristics of term deposits have been enlisted below:

1. Fixed rate of interest - The interest rates for the term deposits remain fixed and are not subject to market fluctuations till the date of maturity. It is advisable to consider term deposit plans that offer the highest interest rate.
2. Safe investment option - Its resistance towards the changing economy, makes it a risk-averse investment opportunity that is widely availed.
3. Predetermined tenor - An investor can choose the tenor of the term deposit plan based on the various plans offered by the financial institution. Generally, a longer tenor is accompanied by a higher rate of interest. This does not necessarily mean that the longest tenor guarantees the highest return. One must compare the interest-to-tenor ratios offered by the institution before choosing a plan.
4. Interest payment frequency - An investor can choose to obtain the interest income either upon maturity or at periodic intervals i.e. fortnightly, monthly, quarterly or yearly.
   

1. Growth in savings - The returns obtained upon maturity of the term deposit are predetermined, hence enabling investors to plan their finances across the lifetime of the plan. The interest rates attached to the deposit ensure the growth in savings periodically.
2. Rollover term during maturity -  In case an investor does not wish to immediately utilize their returns, they can opt for a ‘rollover term’. This refers to the reinvestment of the returns upon maturity in a different term deposit and adding on to your interests.
3. Penalty for premature withdrawal - Term deposits come with a predetermined lock-in period. A premature withdrawal is usually charged with a penalty fixed by the financial institution along with lowered interest income. An investor is advised to choose a tenor compatible with their financial needs to avoid early withdrawals.

1. Loan against deposit - Instead of prematurely closing your term deposit, one can choose to avail a loan up to a maximum of 60-75% of the deposit amount. The rate of interest of such a loan tends to be higher than the interest rate on the term deposit.
2. Taxation on interest - The interest income gained can be taxed as per Tax Deducted at the Source (TDS). An interest income which exceeds Rs.10,000 in a financial year can be taxed up to 10%. One can look to opt for Tax Saving Term Deposit plans.
3. Limit on deposit balance -  The minimum size of deposit that one can park is usually Rs.1,000. The lower limit differs with each financial institution. However, there is no universal upper cap on the amount that you can park.
4. Insurance on deposit - The RBI has ruled that any savings deposit in a certified bank is entitled for an insurance cover up to Rs.1 lakh under the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Benefits of a Term Deposit

Investing in a term-deposit comes with several benefits. They are as follows: 

1. Return is guaranteed - In case of term deposit investment, the return is already decided. This means, at the time of purchase, the investor knows the interest they will be earning on maturity.  

1. Less risky - The remuneration in case of term deposit is fixed. That is why investing in term deposit is safe investment option as compared to other saving options. 
2. Date of maturity is flexible: The depositor can choose the period for which they want to park their money. 

Key Interest Rate Factors to Consider in a Term Deposit

An investment for a term deposit requires a significant amount of funds. One tends to consider options that would give them the highest returns and timely interest payments.

The following factors can be taken into consideration while opting for a term deposit plan:

1. The returns are usually obtained as direct credit unless one opts for a rollover term.
2. In case the bank with your savings account is not offering a lucrative term deposit plan, one can opt for a different bank. However, it is recommended that the latter is willing to credit the interest income in the savings account of the former bank.
3. According to their financial needs, an investor can either choose to receive their accumulated interest income upon maturity or receive the interest at period intervals. These intervals could be fortnightly, monthly, quarterly or yearly.
4. It is recommended to carefully know about the customer reviews of the term deposit plan that one is considering and compare viable options.
5. An investor could also ensure that a savings account could offer a higher interest rate than the term deposit plan that they are considering.

How to Apply for a Term Deposit

The process of applying for a term deposit is similar to that of a savings account. In fact, if a potential investor is looking to open a term deposit at a bank which already houses their savings account, the process becomes more simplified. A majority of the banks and other financial institutions have enabled online provisions to application with time-saving verification process. It must be noted that the eligibility criteria rolled out by these institutions could differ and hence, one must check their necessary parameters before applying for a plan.

How to Open a Term Deposit Account

An investor can open a term deposit account by visiting the bank or the financial institution where they wish to create the account. This would be followed by filling out an application form for the same and verification of the essential documents such as their Permanent Account Number (PAN) card and Aadhaar Card. They might also be required to submit photocopies of the requisite documents.

One can also opt to apply for a term deposit online through the steps mentioned (could vary with each bank):

1. The prerequisite to applying for a term deposit online is to have access to an active net banking feature and a valid PAN card number.
2. After entering one's username and password into the online portal, one gets access to the list of online services provided by the bank.
3. One can select the option of creating a term deposit account option from the list.
4. This would be followed by entering details about one's account and nominee (if any).
5. The next step would be to enter the amount that would be parked for the deposit account.
6. It is important to consider the interest-to-tenor ratio before selecting a plan that is best suited to one’s needs.
7. In case of a non-cumulative term deposit, one can then opt for the interest payment frequency which would either be fortnightly, monthly, quarterly or yearly.
8. If the request is successfully processed with accurate details, an account can be created ideally within one to two business days.

How to Close a Term Deposit Account

Closing a term deposit account prior to maturity is accompanied by penalty charges. If one wishes to prematurely withdraw the deposit, they must notify the respective bank or financial institution. This would require the submission of a document validating the closure towards the institution. The necessary charges would be deducted from the amount received by the investor.

A term deposit account be closed online through the following steps (could vary with each bank):

1. If an account holder has access to net banking, they need to enter in their credentials i.e. username and password to log in to the bank's website.
2. The next step would be to select the 'Close account' option enlisted under the term deposit services.
3. This would direct you to all the term deposit accounts that you have created with the respective bank. Select the account that you wish to terminate.
4. This will be followed with a verification of your account details and a 'confirmation' prompt.
5. The account holder's registered mobile number and email address would receive a notification and instruction that needs to be followed in order to complete closing process.
6. After receiving a notification about the closure, it is suggested to check the savings account to ensure that the amount has been credited.

Types of Term Deposit

Cumulative and Non-Cumulative Deposits: In cumulative deposits, interest is reinvested and paid at maturity. Ideal for those who don’t need regular income. Non-cumulative deposits offer regular payouts fortnightly, monthly, quarterly, or yearly suited for those who need steady cash inflow.

Company Fixed Deposit Schemes: Deposits placed with financial companies for a fixed period. Interest is based on the company’s rate. These are unsecured and depend on the company’s financial position. Governed by Section 58A of the Companies Act and usually have a 3–6 month lock-in. Offered by Mahindra Finance, Shriram Transport Finance, and PNB Housing Finance.

Sweep-in Facility Term Deposit: Offers higher interest than savings accounts while keeping liquidity. Excess savings balance above a set limit is converted into a term deposit, and shortfalls are covered by withdrawing from it. Broken in Re.1 units to prevent loss of interest. Offered by banks like Kotak Mahindra and HDFC.

Short-Term Deposits: Tenure ranges from 1–12 months, preferred by investors seeking quick returns. Interest is lower than long-term deposits. Typical rates: 4%–5% for 7–30 days and 7%–7.25% for 3 months to 1 year (below ₹1 crore). A rollover option is recommended.

Long-Term Deposits: Locked for 1–10 years with 7.5%–8.25% interest, chosen by those wanting long-term savings growth.

Senior Citizen Term Deposits: Banks offer 0.5% higher interest for individuals above 60. Benefits include nomination, premature closure, and sometimes sweep-in and overdraft facilities. Senior citizens can also opt for tax-saving deposits.

Special Deposit Schemes for Children: Includes schemes like Sukanya Samriddhi Account for girls above 10 with a minimum ₹1,000 yearly deposit. PNB’s Balika Shiksha Scheme allows girls who passed 8th grade to open a term deposit. Allahabad Bank’s Sishu Mangal is for children aged 1–15 years.

Post Office Time Deposit: Can be opened singly or jointly, with nomination and branch transfer facility. Premature withdrawal is not allowed before 1 year; 2% deduction if withdrawn within 3 years and 1% after that. Minimum ₹200 deposit. Current rates: 6.9% (1 yr), 7.0% (2 yrs), 7.1% (3 yrs), 7.5% (5 yrs). Deposits over 5 years qualify for Section 80C benefits.

Tax-Saver Term Deposits: Eligible under Section 80C with a 5-year lock-in. Interest above ₹10,000 is taxable. Typical rates: 5.5%–7.75%. Tax benefit applicable up to ₹1.5 lakh. Many banks issue quarterly TDS certificates.

Recurring Deposits (RD): Allows monthly fixed deposits for a set period, minimum ₹100, tenure up to 10 years. Premature closure allowed by many banks; partial withdrawal usually not permitted. Some banks require a savings account or PAN card. Interest is paid at maturity, and TDS applies under Section 194A. HDFC and Kotak don’t allow changes to installment or tenure; HDFC doesn’t pay interest if closed within one month of opening.