Fixed deposits (FDs) are preferred by investors for their low exposure to risk, guaranteed interest and easy-to-understand structure. Often, they are perceived as long-term instruments with tenures going up to many years. However, you can also choose short-term FDs, which have tenures of less than one year.

In this article, we discuss what short-term fixed deposits are, how they work, what short-term FD rates are like and more.

What is a short-term fixed deposit

A short-term FD is simply a fixed deposit with a shorter tenure than a regular FD. Typically the tenures of fixed deposits range from 7 days to 10 years or more. If the tenure is less than 12 months or 1 year, it is often classified as a short-term fixed deposit.

This type of FD allows you to temporarily park your funds in a safe deposit account for a few days or months. During this period, instead of having your money sit idle, you can earn interest on it at the short-term fixed deposit rate offered by the bank or financial institution that offers the FD facility.

You must be aware of the following key components of a short-term FD before you opt for this facility:

FD generally offers 5% to 10 % interest p.a. Some financial institution like Bajaj Finance offers flexible tenure on their FD such as monthly, quarterly, half yearly and annually. Bajaj finance offers one of the highest FD rates of up to 7.30% p.a. for senior citizens (above the age 60) and up to 6.95% p.a. for individuals below the age of 60.

• Deposit renewal: You can renew your short-term FD at the end of the tenure if you wish to. Most leading banks also offer the option of automatic renewal.
• FD interest taxation: The interest you earn on these deposits at the short-term FD rate is subject to income tax at the applicable slab rate.
• Premature closure: You can generally withdraw your deposit before the end of the tenure. However, the bank or financial institution may charge a penalty for this.
• Nomination: You can also assign a nominee for your short-term fixed deposit account. This makes fund transfers easier in case of any untoward incident.

Eligibility for the short-term FD

To open a short-term fixed deposit, the following conditions generally apply:

• Most banks require you to have an existing savings account with them.
• The facility is primarily available to Indian residents.
• Some banks may also offer short-term FDs to Non-Resident Indians (NRIs), depending on their policies.

Advantages of short-term deposits

Short-term fixed deposits have many benefits. Here are the top reasons to choose this deposit facility.

• High liquidity: Short-term fixed deposits have high liquidity, so they allow you to park your funds temporarily and safely in the FD account.
• Loan against FDs: You may also be eligible for a loan against the fixed deposit to the tune of 70% to 90% or more of the deposit amount. Bajaj Finance offer loan against FD, up to 70% of the deposit value.
• Guaranteed interest: These fixed deposits offer guaranteed interest on the amount deposited.
• Transparent terms: The terms of the FD are also transparent right from the start. You will know the short-term FD rates, premature closure penalty and other T&C upfront.

Conclusion

A short-term FD can be extremely useful if you require a safe and liquid avenue to park your money and earn interest in the process. However, before you go ahead with this option, ensure you account for the tax liability on the interest you will earn. If you are looking for an easy way to deposit your money for a few months and earn interest at attractive rates during the period, the Bajaj Finance FD can be an excellent option to consider.

You may be interested in reading the articles below, related to FD

• Tax on Interest on FD
• How to Count FD Interest
• FD vs Rd
• FD vs Mutual Fund
• Types of FD
• What Is FD Account
• FD Receipt
• Sip vs FD