If you were to walk into your bank to make a deposit, would you know whether you are making a term deposit or a fixed deposit? Would you even know the difference between the two? Although there is no major difference between the two, bankers tend to use the word term most frequently. There are some slight differences, however, that can be discerned.A term deposit is typically used when a deposit is extended for three to six months, whereas a fixed deposit is for a period of time longer than 6 months. Since the term deposit is for a longer period of time, it will have a higher rate of return. When the money is deposited, the customer understands that the money is there for the predetermined period which usually ranges from one month to five years, and the interest rate is guaranteed not to change for that nominated period of time.As far as terminology goes, the term fixed deposit is more common in India and Asian countries, whereas term deposit is used in Canada, New Zealand, and Australia.
How do term and fixed deposits work?With both of these investment options, you deposit a sum of money for a period of time in order to earn interest. Fixed term deposits of this type are safe with no real risk involved, and they can be made at private and nationalized banks. They are also available at credit unions and building societies. There is a range of interest rates to be considered. At the time the investment matures, the initial investment and interest are payable. If the investor has not specified otherwise, the deposit term is renewed for the same fixed term of months at the current interest rate. If you withdraw the funds prior to their maturity date, you will incur a penalty and a lower rate of return will be calculated on the initial contracted rate. In some cases, a bank will ask you to open another account with the deposit account, but this is not a requirement with all banks.In order to save on taxes, you may invest in a five-year fixed or term deposit to defer taxes. Also, there are term deposits that will pay you interest income on a regular basis with a lump-sum towards it. Interest rates vary in Australia depending on the amount invested, the term, and of course where you make the deposit.Is there a difference in taxation?Whether it is a term or fixed deposit, taxation rules are the same. Any interest you earn on either type of account must be reported and is taxable as income. Other differencesSo why are there two terms for the same transaction? You would make a term deposit for periods of time that can be as short as two weeks and as long as 10 years. Fixed deposits are more commonly used for bank deposits and term deposits are used for company deposits. The question then becomes, which do you buy? Since it has been determined that there is minimal difference, then the answer is simply that you can buy, either. If you are looking for the best returns, especially if interest rates are low or falling, you would do best with company deposits that have a high rating. In either case, it is advisable to be aware of the tax implications for your particular situation. Term deposits are popular with investors who prefer capital security and a set return as opposed to the fluctuations of the share market. Many investors also use term deposits as a part of their investment mix.As with any financial decision, it is always advisable to consult a financial advisor when making investment decisions.
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