What is Short Term Fixed Deposit (FD)?

Benefits of Short Term Fixed Deposit

1. The maturity term of a short-term fixed deposit ranges from seven days to less than 12 months. 
2. You can deposit money in such a term deposit only once. 
3. You can opt to renew the short-term fixed deposit account when it matures. 

1. The tax on the funds in the account is deducted as per the Income Tax Act, 1961. 
2. The rate of return on a time deposit account is usually high. 
3. Money can be withdrawn from an FD account before maturity but only after paying a fine. However, there are some banks which offer no penalty on withdrawing money before maturity. 
4. The minimum amount that you can invest in a short-term deposit account varies from bank to bank. It is generally around Rs.10000. For minors, the starting amount is brought down by the banks. 

Key Advantages of Short-Term FDs

1. It is the ideal option if you want to have transitory savings.
2. It provides greater liquidity with a high rate of return.
3. A major advantage of such a fixed deposit is that it allows you to take a loan amount equivalent to 95% of the funds in your account without requiring a guarantor or any paperwork.
4. There is a provision for nomination when you open a term deposit account.
5. If you withdraw money before your term on the account ends, you will be charged an interest rate that is 1% less than the applicable rate.
6. The government considers funds in the short-term fixed deposit account as security.
7. The funds in short-term deposits can also be used as margin money for non-fund-based services.

Requirements to Open a Short Term Fixed Deposit Account

To open this type of fixed deposit account, the requirements vary bank to bank. Most banks ask you to open a savings account along with the short-term fixed deposit account. This removes the hassle of collecting the interest amount in person and it can be directly transferred to your savings account.

Also, the account holder should be a resident Indian although some banks offer Non-Resident Indians (NRIs) the option to open a short-term fixed deposit account as well. To open a fixed deposit account, you would need identity proof, passport size photos and proof of address.

Some Options for Short-Term Investments

Investing and saving money is something everyone wants and needs. Even though, most of the time, saving money and investments are on a long-term basis. Mutual funds and fixed deposits are beneficial on a long-term basis and help with the accumulation of a large amount of money with the help of good interest rates.

However, it is also highly beneficial to invest money on a short-term basis. While long-term investments can range from one year to three years or five years or ten years, short-term investments range between one week to up to a year.

Recurring deposits:

One of the most common modes of short-term or long-term investments is recurring deposits.

The duration of recurring deposit ranges from a minimum of three months and can go up to ten years as well. There are no premature withdrawals allowed. The only way you can withdraw the money is during maturity or due to premature closing.

The rate of interest for a recurring deposit is currently ranging between 4.5% per annum to 7.9% per annum.

Bank Fixed Deposit:

A short-term bank fixed deposit is another method of investing money for a shorter period of time. The tenure for this type of fixed deposit can range between seven days and up to one year.

The interest rate ranges between 3.5% per annum to 6.75% per annum which is taxable. There is no maximum limit for the fixed deposit, however the minimum amount is Rs.100.

Post Office Time Deposit:

Under this type of short-term investment, the tenure ranges between one to five years. This type of deposit is under the tax exemption scheme under Section 80C.

The rate of interest is high and ranges between 6.9% per annum to 7.8% per annum. The minimum amount required to open the account is Rs.200.

Flexi Fixed Deposit:

This is an alternative for a savings account where any kind of excess amount which is more than the stipulated limit can be shifted to a sweep-in fixed deposit account. This account is known by different names depending on the bank.

The rate of interest is the same as the fixed deposits of the bank, which is around 6.5% per annum and the tenure is mostly 12 months. The interest earned annually will be taxed if it is above Rs.10,000.

There are other methods or options for short-term investments such as debt funds or debt mutual funds. The tenure is less than 12 months and the rate of interest is around 7% per annum.