Question

Explain the different types of schemes through which a bank may receive time deposits.

Answer 1

Fixed Deposit (FD):

1. It is used to invest a lump-sum amount for a fixed tenure at a predetermined interest rate.
2. Features of Fixed Deposit are:
   1. Tenure: This can range from a few months to several years but is normally between 7 days and 10 years.
   2. Interest Rate: Higher than savings accounts; fluctuates depending on tenure.
   3. Interest payments It might be compounded (quarterly, semi-annually, annually) or made on a regular basis (monthly, quarterly).
   4. Premature withdrawal: It is usually allowed with a penalty.
   5. Tax Benefits: Tax-saving FDs provide tax benefits under Section 80C of the Income Tax Act for investments up to ₹1.5 lakh, with a 5-year lock-in period.

Recurring Deposit (RD):

1. It is used to encourage regular savings, by depositing a certain amount each month for a set period of time.
2. Features of Recurring Deposit (RD):
   1. Tenure: Typically, it runs from six months to ten years.
   2. Interest Rate: Similar to FDs, the RD's value is determined when it is opened.
   3. Fixed monthly deposits: The depositor agrees to deposit a certain amount every month.
   4. Maturity: At maturity, both the principal and interest are paid out.
   5. Premature Withdrawal: Allowed with a penalty, although some banks may provide credit facilities against RD.