Short Term FD Vs Long Term FD: Which is the best?

When you want to choose between a short term and a long term FD, then you should understand both deeply before selecting one. A long term FD is similar to that of a regular fixed deposit, and it offers higher liquidity and returns. Whereas, a short term FD involves investing a fixed sum and growing it for a shorter tenure. Short term FDs are ideal when you want the money back again within a short period. 

Short term fixed deposits have tenures ranging from 7 days to 2 years, whereas a long-term one is more than two years and is suitable for long term goals. According to your financial goals and needs, you can plan your fixed deposit maturity for ensuring liquidity.

Understanding the benefits and features of a short-term and long-term fixed deposit will help you in picking the one that will best please you:

Short Term FDs Features & Benefits:

Here are the features and benefits of short term fixed deposits that you should understand before getting one:

• The lowest amount that you can invest in FD (short term FD) will vary depending upon the financial provider you choose.
• Fixed deposits are generally safer investment options as it doesn’t depend on the market for its returns.
• The tenure for a short term fixed deposit ranges between 7 days to 2 years.
• The lock-in period for short term FDs is low.
• The returns of the fixed deposit come under taxable income.
• Just like a standard fixed deposit, a short term FD also involves depositing a fixed sum for a specified period with a pre-determined interest rate.
• When you have short term goals like purchasing a gift or new vehicle, then a short term fixed deposit will be the best option for you.
• Any withdrawal before the tenure will result in a penalty, so always make sure to keep the fixed deposit intact for the tenure.
• The interest rate for the short term fixed deposit is attractive and constant than other investment options.

Long Term FDs Features & Benefits:

• Long term fixed deposits are easy to open, and the application process is shorter, easy and transparent to follow.
• With long term fixed deposits, you can get a loan against FD when you apply for it.
• Depending upon your needs, you should choose a flexible tenure that suits you the best.
• The amount that you invest in your long term fixed deposit depends upon your requirements.
• A long term fixed deposit amount is the one that you can quickly liquidate when you are in need.
• The long term fixed deposits are for fulfilling your long term goals like building your dream home or higher education for your kids.
• The longer the tenure lasts, the higher the interest rate will be for your fixed deposit. So when compared to short term fixed deposits, long term ones have higher interest rates.
• The tax deduction for this deposit will take place at source, or you can declare it while you file your IT returns.
• The long term fixed deposits come with a feature for auto-renewal. With an auto-renewal option, you can renew your fixed deposit automatically without any additional formalities.
• The long term fixed deposit will have a more extended lock-in period than a shorter one. So make sure to decide to keep the deposit intact till the tenure ends to avoid penalty.

TDS Savings On FD Interest Income:

The interest that you gain on a fixed deposit comes under taxable income. You can make sure to avoid tax by splitting up your interest less than Rs.40,000 each financial year in a particular financial institution. Though you choose short term or long term fixed deposit, the capital amount will be the same. But it would help if you calculated the interest accumulation according to the rate the financial provider offers. 

When you split and invest your fixed deposits, and make sure to get a different maturity period and confirm it doesn’t cross the Rs.40,000 limit. With this method, you can get rid of the unnecessary tax on your fixed deposit by submitting form 15G/H.

Building A Solid Financial Plan Using A Short & Long Term FD:

Both short term and long term fixed deposits use solid financial planning that makes it successful. When you want a lump sum after 1.5 years, but you don’t want to keep the money idle till then, then you can choose for a fixed deposit with the tenure. In those cases you cannot select a long term fixed deposit, you should go for a shorter tenured one. 

When there is a long term fixed deposit, and the interest rates fall during the tenure, your interest rate will be constant through your tenure. Even though you plan on renewing your short term fixed deposit, the interest rate drop will affect you. It will reduce your earning to a greater extent.

You can opt for a five-year tax-saving fixed deposit when you are sure you won’t need that money for five years. The lock-in period for a saving fixed deposit will be five years before that you cannot withdraw your fixed deposit. 

Both long and short term FD is a combination that will keep your liquidity intact by doing short-term FDs on frequent intervals. Else you can directly go for an auto-renewal option to make it very easy for you. When you have a few long-term FDs that will mature 3 to 5 years from now, then you will have the liquidity you need. 

You can either reinvest or use the liquidated amount to get more benefit out of it. When you split and invest, it will help you in making sure you aren’t breaking your fixed deposit and lose the precious interest-earning that comes along with it. A combination of both short and long-term investment can help you in the long run through all your financial planning. Proper planning will act as a backbone to help you gain more with your investment choices.