Demand deposit and term deposit accounts are two different types of deposit accounts offered by Indian banks and NBFCs. Demand deposits hold funds that can be easily accessed, while term deposit accounts lock in funds for a predetermined term, ranging from a few months to a few years. Demand and term deposit accounts differ in terms of liquidity as well as the interest offered. Let us understand each type of account and their differences in detail below.
 

FD offer fixed interest for the whole investment as interest rate offered on FD are fixed does not change with market fluctuations. The interest rate offered on FD may vary from different financial institution 

Demand deposits

Demand deposit accounts are bank accounts from which funds can be withdrawn at any time without advance notice. Demand deposit account holders enjoy greater liquidity when withdrawing funds at their convenience without incurring penalty charges. However, some banks may charge a nominal fee if you exceed the monthly withdrawal limit.
 

The relatively liquid nature of demand deposit accounts makes them apt for storing funds you may need access to in the near future. Regular savings bank accounts and current accounts are examples of demand deposit accounts. While demand deposit accounts provide easy access to your saved corpus, they generally offer lower interest rates than term deposits and also carry certain allied account handling charges. 

Term deposits

Term deposits, popularly known as time deposits, are investment deposits where a lump-sum amount is deposited for a certain predetermined period. This time frame can range from a few months to several years. The deposited principal earns interest at a fixed rate throughout the deposit tenure. Fixed deposits are the most well-known term deposit accounts in India.
 

Term deposit accounts lock in your funds for a given time frame and offer above-average returns when compared to traditional savings accounts. Moreover, funds deposited for a longer period earn a higher interest rate. However, you cannot withdraw funds from a term deposit account until the end of the selected tenure. While premature withdrawals may be permitted, they attract an interest rate penalty. At the end of the tenure, you can choose to withdraw your principal plus interest or roll over the corpus to a new term deposit.
 

Fixed deposit are investment instruments that offer a fixed rate of return over a specified period. They are considered relatively safe and suitable for risk-averse investors seeking steady income.

Here is a comprehensive list of differences between demand and term deposit accounts:

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Are demand deposits insured by the government?

Demand deposit accounts in all commercial banks in India are insured by the government. Demand deposits in savings and current accounts are insured by the DICGC or Deposit Insurance and Credit Guarantee Corporation, which is an RBI subsidiary. In fact, the DICGC insurance also covers fixed and recurring deposit accounts. Each depositor enjoys a maximum cover of Rs. 5 lakhs on both the principal and interest earned. For the purpose of insurance coverage, the deposits kept in different bank branches are aggregated and the maximum cover applies to this aggregated value.

Term deposit accounts generally do not permit premature withdrawal of funds. However, banks may allow premature withdrawals against an interest rate penalty. In other words, to access your saved funds, you may have to lose out on interest earnings. The penalty rate varies from one bank to the next. Therefore, it is always advisable to check the bank’s policy and terms before opening a term deposit account.

As an investor, you can open and maintain multiple term deposit accounts at the same time. Doing so may be prudent as you can promote goal-oriented savings. You can also diversify your investments with one or two term deposits, creating a safety net for your portfolio. Additionally, opening multiple term deposit accounts also helps you benefit from a staggered maturity system. Different deposits mature at different times, creating a steady cash flow, eliminating the need for premature withdrawals. Moreover, multiple term deposits can also help you leverage the benefits of varying interest rates and optimise your interest earnings.