deposit

What Is a Deposit?

A deposit is a financial term that means money held at a bank. A deposit is a transaction involving a transfer of money to another party for safekeeping. However, a deposit can refer to a portion of money used as security or collateral for the delivery of a good.

Types of Deposits 

There are two types of deposits: demand and time. A demand deposit is a conventional bank and savings account. You can withdraw the money anytime from a demand deposit account. 

Time deposits are those with a fixed time and usually pay a fixed interest rate, such as a certificate of deposit (CD). These interest-earning accounts offer higher rates than savings accounts. However, time deposit accounts require that money be kept in the account for a set period of time

KEY TAKEAWAYS

• A deposit is a financial term with multiple definitions.
• One definition of deposit refers to when a portion of funds is used as security or collateral for the delivery of goods or services.
• Another kind of deposit involves a transfer of funds to another party, such as a bank, for safekeeping.

How a Deposit Works

A deposit encompasses two different meanings. One kind of deposit involves a transfer of funds to another party for safekeeping. Using this definition, deposit refers to the money an investor transfers into a savings or checking account held at a bank or credit union.

In this usage, the money deposited still belongs to the person or entity that deposited the money, and that person or entity can withdraw the money at any time, transfer it to another person’s account, or use the money to purchase goods.

Primarily, banks offer two kinds of deposit accounts. These are demand deposits like current/saving account and term/ time deposits like fixed or recurring deposits. When you open a deposit account in a bank, you become an account holder or a depositor.Saving accounts are used to meet daily on-demand requirements of cash. For example, you hold a saving bank account with the bank having cheque book facility. The bank asks you to maintain a minimum balance of Rs 1000. In return, the bank pays you an interest at the rate of 4% per annum.

You may operate the saving account using an ATM card also. Banks impose limits on the frequency and amount of withdrawal using ATMs. The deposit rates on saving account keeps changing based on RBI’s revision of policy rates. Banks offer lower interest rates on saving account as compared to term deposits. It is because of this reason, investors opt for term deposit accounts.A term deposit account is used to hold money for a fixed period of time. In return for this, the bank pays interest on the term deposits. However, you are not allowed to withdraw your money before expiry of the fixed duration. For example, you hold a fixed deposit (FD) of Rs 10,000 for a period of five years with the bank. In return, the bank pays you an interest at the rate of 10% per annum.

Why do I need to maintain deposits at the bank?

Nowadays, maintaining a bank account has become a norm. You need to provide your bank account number on various occasions; like receiving the salary from employer or subsidy from the government under a scheme. There are various other reasons to maintain a deposit account:

Easy access to money

Keeping your money in a bank account is wiser than stacking it under your mattress. It is a much more secure way and you can withdraw your money whenever you need it. In fact, you may even transfer it to another account using a secure gateway.

Earn returns on bank account

Storing money in safe deposit vault at home doesn’t attract any interest. If you will, instead, deposit in a bank account your money will earn interest. However, that amount of interest is ineffective to counter inflationary pressures in the economy.

Inculcates habit of saving

Maintaining a bank account like a recurring deposit (RD) can help in inculcating savings habit. RDs are basically an investment tool which allows investors to make regular monthly payments and save money for the long term. 

Fixed Deposits (FDs): How they work

Fixed Deposits have been a tried-and-tested savings method for a long time. Almost all banks in India have Fixed Deposits schemes available for their customers. You can read more about the rules and processes of obtaining FDs here. While FDs have been the conventional investment tools, you need to keep some things in mind before going for one:

Spread your investments

If you want to invest in an FD, do not park all your investments in a single bank. You need to know that bank FDs aren’t as secure as you think. In case of bank default, you will be eligible for a maximum compensation of Rs 5 lakh from Deposit Insurance and Credit Guarantee Corporation (DICGC) with effect from 4 February 2020.  This happens even though you held deposits of amount higher than Rs 1 lakh. If you have Rs 5 Lakh to invest, then hold FDs of Rs 1 lakh in five banks rather than Rs 5 lakh in a single bank.

Premature withdrawals attracts penalty

You need to know that FD involves a lock-in period equal to duration of the investment. Before going for an FD, review your income needs for the horizon. If you institute an FD for a 5-year term, then the bank won’t allow for withdrawals before completion of 5 years. In case you need your money before maturity, bank will impose a penalty. If the penalty is 1%, then you may lose more than you earned during the tenure. Thus, it’s advisable not to break your FDs before maturity.

Interest earned is clubbed in your income

FDs aren’t as tax-efficient as mutual funds and equities. The interest earned on FDs will be clubbed in your total income and taxed as per your income slab. Suppose you create an FD in the name of your spouse. The money deployed to create FD won’t attract tax but the interest earned will form part of your income and be taxed.Equity-Linked Saving Scheme  can be a tax-efficient way to invest and grow wealth. It has the shortest lock-in period. Moreover, it offers higher returns than FD.

Recurring Deposits (RDs): Are they for you?

RD or Recurring Deposits are an investment tool which allows investors to make regular monthly payments and save money for the long term. Investors can choose the tenure of the deposit and the minimum monthly payment they wish to make according to their convenience. RD schemes are generally more flexible than FD schemes and are generally preferred by those who want to start an account for the purpose of saving money and building a rainy-day fund. Here are some things you should keep in mind while opting for a Recurring Deposit:

Use RDs for short-term goals

Recurring deposits are the ideal products to opt for when planning short-term goals you wish to realize in the next 1-3 yrs. These may include saving up for a downpayment of your new home, paying for your children’s education, renovating your home, saving up for a degree abroad and so on.

Be aware of the rules and penalties

Recurring deposits are very easy to open. Most banks in the country have this facility. But, they do come with some hidden charges. For instance, if you were to withdraw the amount in the RD account before the tenure finishes, you may have to pay certain charges. It is important to know these rules before you start an  RD account so you can be better prepared for the future. Apart from these, there are other types of accounts in which you can deposit your money:

Current Account

A current account is a type of bank account which allows the user to carry out a significantly high number of transactions. The money in this account is always available for immediate access and is usually operated by business individuals, proprietary concerns, public and private companies, associations, trusts, etc. who have reasons to make frequent and high-volume transactions with their banks.

Savings Account

A savings account is a like a bank vault in which you store your hard-earned money. Unlike a current account, a savings account does not allow unlimited transactions and has no overdraft facility. There are different types of savings account that can be opened depending on the customer’s need:

• Regular Savings Account: These are the easiest to open. Such accounts do not see huge transactions and are mostly a virtual safe for storing excess cash.
• Salary Based Savings Account: Many corporations tie up with banks to help their employees open a salaried account. This helps the company as the task of disbursing the monthly salaries becomes easier.
• Savings Accounts for Senior Citizens: These accounts are created exclusively for senior citizens with added privileges and benefits.
• Savings Accounts for Children and Minors: These accounts are created exclusively for children and minors under the guardianship of their parents.
• Exclusive Benefits Accounts for Women: As the name suggests, this is an account exclusively for female customers and entrepreneurs. It is a relatively new offering from some banks and comes with added benefits.
• Zero Balance Savings Account: A savings account where the customer need not maintain a minimum balance for the account to remain functional.
• Linked Savings Account: A linked account is one which is linked to either a given Checking Account or a NOW Account (Negotiable Order of Withdrawal).
• Post Office Savings Account: These are savings accounts which can be opened in a Post Office.

Example of a Deposit 

Deposits are also required on many large purchases, such as real estate or vehicles, for which sellers require payment plans. Financing companies typically set these deposits at a certain percentage of the full purchase price, and individuals commonly know these kinds of deposits as down payments.

In the case of rentals, the deposit is called the security deposit. A security deposit's function is to cover any costs associated with any potential damage done to the property or asset rented, during the rental period. A partial or a total refund is applied after the property or the asset is verified at the end of the rental period.