Difference Between Short-Term and Long-Term Fixed Deposits is an important topic for investors who want to choose the right FD based on their financial goals and time horizon. Short-term FDs are suitable for parking surplus funds for a brief period, while long-term FDs help in earning relatively stable returns over several years. Understanding how they differ in terms of tenure, interest rates, liquidity, and tax impact can help you make a smarter investment decision.
In this blog, we’ll clearly explain the difference between short-term and long-term fixed deposits so you can select the option that best matches your needs.
Understanding Your Financial Timeline
Fixed deposits serve different purposes depending on your investment horizon. Short-term goals typically require funds within 12 months, whilst long-term goals span multiple years. The key lies in matching your FD tenure with your financial timeline.
Current market data shows that short-term FDs (7 days to 1 year) offer interest rates between 3.25% and 6.25%, whilst long-term FDs (1-10 years) provide 6.25% to 7.60%. This rate differential of 1-2% might seem small, but compounding makes it substantial over time.
Fixed deposits are among India’s most popular investment options, offering guaranteed returns with minimal risk. According to RBI data, Indians have invested over ₹140 lakh crore in bank fixed deposits as of 2023, showing our nation’s trust in this instrument.
When investing in a fixed deposit, one of the most critical decisions is choosing the right FD duration. Should you opt for a short-term deposit or lock your money for a longer period? Both have distinct advantages depending on your financial situation and goals.
What is Short Term Fixed Deposit?
A short-term FD is an investment option where you deposit money with a bank for a shorter period that ranges from 7 days to 12 months. It is ideal for those looking to earn interest on idle funds without locking them away for too long. You get assured returns, and the money can be withdrawn after the term ends or rolled over. It’s a safe and easy way to grow your savings in the short run. Short-term FDs are also a good choice for emergency funds or saving for near- future expenses without market risks. Short-term fixed deposits typically have tenures ranging from 7 days to one year. These deposits are optimal for individuals seeking quick returns and greater liquidity.
Advantages
- Liquidity: Short-term FDs provide easy access to your funds upon maturity, which is beneficial for short-term goals, such as traveling or meeting unexpected expenses.
- Responsive to Rate Changes: Given their short durations, you can frequently reinvest to take advantage of favourable shifts in interest rates, thereby capitalizing on the best short term fixed deposit rates available.
- Quick access to funds when opportunities arise
- Lower penalty charges for premature withdrawal
- Reinvestment flexibility if interest rates rise
- Reduced interest rate risk compared to long-term commitments
Important Things to Consider
- Lower Interest Rates: These deposits generally offer lower interest rates compared to long-term alternatives.
- Frequent Management: Regular renewal is required, which might involve some administrative efforts and the risk of reinvesting at potentially lower rates if market conditions change.
Understanding Short-Term FD Rates
Short-term FD interest rates vary depending on the deposit tenure, even within short-term options. Short-term FD rates help you earn more from idle money while keeping your funds relatively accessible.
For Example, a 6-month FD may offer higher interest than a 30-day FD. In ICICI Bank, the Short Term FD rates start from 2.75% p.a. for general and 3.25% p.a. for senior citizens. These rates are fixed at the time of deposit and don’t change during the FD term.
Key Characteristics of Short-Term FDs
- Tenure: 7 days to 12 months
- Interest rates: 3.25% to 6.25% annually
- Liquidity: High, with minimal penalties
- Compounding benefit: Limited due to shorter duration
| Tenure | Interest Rate | ₹1 Lakh Investment | Maturity Amount |
| 3 months | 4.5% | ₹1,125 | ₹1,01,125 |
| 6 months | 5.5% | ₹2,750 | ₹1,02,750 |
| 12 months | 6.25% | ₹6,250 | ₹1,06,250 |
Simple Interest Formula:
This method is commonly used for short-term fixed deposits and loans where interest is not compounded.
For Example: You invest ₹3,00,000 at an interest rate of 5.5% per annum for 6 months (0.5 year).
Interest = Principal × Rate × Time ÷ 100
Where:
- Principal (P) = Original amount (₹3,00,000)
- Rate (R) = Annual interest rate (5.5%)
- Time (T) = Time period in years (0.5 year = 6 months)
Interest = ₹3,00,000 × 5.5 × 0.5 ÷ 100 = ₹8,250
- After 6 months, you earn ₹8,250 as interest
- Total amount received = ₹3,00,000 + ₹8,250 = ₹3,08,250
- Interest is calculated only on the principal, not on accumulated interest
Your maturity amount becomes ₹3,08,250 before tax deductions.
Why do we divide by 100 in the Simple Interest formula?
The rate of interest is given in percentage (%), and percentage means “per 100.”
So when the rate is 5.5%, it actually means: 5.5 per 100
To convert this percentage into a usable number for calculation, we divide by 100.
Benefits of Choosing Short-Term FDs
Short-term FD options offer several advantages for specific financial situations:
- Higher Liquidity: Your money remains accessible with shorter FD lock-in periods
- Flexibility to Reinvest: Ability to reinvest at higher rates when interest rates rise
- Emergency Fund Planning: Perfect for planned expenses within a year
Pro Tip: Consider laddering several short-term fixed deposits with different maturity dates to ensure regular cash flow while maintaining liquidity.
Drawbacks of Choosing Short-Term FDs
Consider these limitations before investing in short-term FDs:
- Lower Interest Rates: While short-term FDs offer quick liquidity, the trade-off is lower interest rates compared to their long-term counterparts. Investors looking for substantial returns might find these rates less attractive.
- Reinvestment risk: Upon maturity, investors face the challenge of reinvesting their funds at prevailing interest rates. If rates have decreased, reinvesting may result in lower returns than initially anticipated.
- Limited wealth accumulation: Short-term investments may not provide the same level of wealth accumulation as long-term options. For those with significant financial goals, relying solely on short-term FDs may hinder long-term wealth growth.
What is Long Term Fixed Deposit?
A long-term FD is where your money is invested for a longer duration, say, ranging from 1 year to 10 years. It is ideal for those who want stable and assured returns over time. Long-term FDs help with financial planning for future needs like education, marriage, or retirement. You earn attractive interest rates, and the rate stays fixed throughout the deposit period. These FDs also discourage frequent withdrawals, making them good for long-term goals. Long-term FDs are safe, low-risk investments, especially suitable for conservative investors seeking steady income.
Understanding Long-Term FD Rates
Long-term FD rates are higher than short-term rates because your money is locked in for longer period. Banks offer attractive interest rates from 6.5% p.a. to 7.1% p.a. for general and senior citizens, respectively. The rate is fixed at the time of opening the FD, which means your returns are protected from market changes. This makes long-term FDs a great choice for consistent income over time.
Benefits of Long-Term FDs
Unveil the key benefits of investing in long-term FDs:
- Higher interest earnings: They provide higher interest rates, enhancing the overall returns on your investment compared to shorter tenures.
- Stable returns: By opting for a longer tenure, you benefit from stable and predictable returns, reducing the impact of market fluctuations.
- Financial planning: They are suitable for long-term financial goals like purchasing a home or planning for your retirement, offering a disciplined approach to saving.
Drawbacks of Long-Term FDs
Assess these potential downsides before committing to long-term FDs:
- Reduced liquidity: They lack the liquidity of their short-term counterparts. Investors commit their funds for an extended period, limiting access to their capital in case of unexpected financial needs.
- Interest Rate rigidity: While long-term FDs offer higher interest rates, they lock investors into a specific rate for the entire tenure. If interest rates rise during the tenure, investors miss out on potential increased returns.
- Opportunity cost: The extended lock-in period might result in an opportunity cost, especially if market conditions change or better investment opportunities arise. Investors might miss out on higher returns available in more dynamic investment options.
Key Differences between short-term and long-term FDs:
| Factors | Short-Term FDs | Long-Term FDs |
| Investment Period | Typically, 7 days to 1 year | Over 12 months to 10 years |
| Interest Rates | Generally lower compared to long-term FDs | Higher interest rates, providing better returns over time |
| Liquidity | Offers quick liquidity, allowing access to funds | Limited liquidity due to the extended lock-in period |
| Reinvestment Risk | Face the challenge of reinvesting at potentially lower rates | Locked into a fixed interest rate for the entire tenure |
| Wealth Accumulation | May not contribute significantly to long-term wealth growth | Provides an opportunity for substantial wealth accumulation |
| Opportunity Cost | Lower opportunity cost as funds can be reinvested sooner | Higher opportunity cost due to the extended lock-in period |
| Flexibility | Provides flexibility to respond to changing market conditions | Offers less flexibility and premature withdrawal may incur penalties |
| Goal Alignment | Suited for short-term financial goals and immediate needs | Aligned with long-term goals like education or retirement planning |
| Risk Tolerance | Lower risk due to shorter tenure and flexibility | Moderate risk due to a more extended lock-in and rate rigidity |
Short-Term and Long-Term FDs?
A short term fixed deposit typically ranges from 7 days to 12 months. These deposits provide quicker access to your funds while still earning better returns than a savings account. On the other hand, long-term fixed deposits have an FD lock-in period of more than one year, sometimes extending up to 10 years.
| FD Type | Typical Duration | Interest Rate Range | Liquidity | Best For |
| Short Term FD | 7 days to 1 year | 3.5% to 6.5% p.a. | High | Short-term goals, emergency funds |
| Long Term FD | Above 1 year to 10 years | 6% to 7.5% p.a. | Low | Long-term goals, wealth accumulation |
Balancing Short-Term and Long-Term FDs
Maximise benefits by strategically balancing short-term and long-term FD investments:
- Diversification: A balanced investment portfolio often includes both short-term and long-term FDs. This diversification can mitigate the drawbacks of each, providing stability, liquidity and reasonable returns.
- Goal-specific allocation: Allocate funds to short-term or long-term FDs based on specific financial goals. Short-term deposits can cater to immediate needs, while long-term deposits align with goals like education or retirement planning.
- Periodic review: Regularly reassess your financial goals, market conditions and interest rate trends. Periodic reviews empower investors to make informed decisions about renewing or reallocating their FD investments.
Strategic Approaches to Choose Between FD Options
Here are a couple of strategic approaches when you have to choose between the two FD options.
- The Laddering Strategy
Instead of choosing exclusively between fixed deposit short-term or long-term options, consider the laddering approach:
- Divide your corpus into equal parts
- Invest in FDs with staggered FD duration (3 months, 6 months, 1 year, 2 years, etc.)
- Reinvest each FD upon maturity for the longest term in your ladder
This strategy combines the liquidity advantages of short-term FD with the higher returns of long-term options.
- Tax Implications and Planning
Fixed deposit interest is fully taxable under “Income from Other Sources.” Banks deduct TDS at 10% if annual interest exceeds ₹40,000 (₹50,000 for senior citizens).
For high earners, consider splitting large FDs across family members to optimise tax efficiency.
- Consider Interest Rate Trends
When deciding whether an FD long-term or short-term is right for you, analyse the current interest rate cycle:
- Rising Rate Environment: Prefer short-term fixed deposits to capitalise on increasing rates
- Falling Rate Environment: Lock in higher rates with long-term fixed deposits
- Stable Rates: Choose based on your liquidity needs rather than rate speculation
Loan Against Fixed Deposits
Fixed deposits offer unique flexibility through loan facilities. You can borrow up to 90% of your FD value at just 1-2% above the deposit rate much cheaper than personal loans.
Calculation Example:
- FD Amount: ₹10 lakh at 7% interest
- Loan available: ₹9 lakh at 8-9% interest
- Your FD continues earning 7% whilst you pay 8-9% on the borrowed amount
This feature makes FDs excellent for managing both short-term goals and long-term goals simultaneously. The loan against the FD facility provides quick access to funds without breaking your long-term investments.
Making Your Decision: Key Questions to Ask
Before choosing between fixed deposit short-term and long-term options, ask yourself:
- What is my investment timeframe?
- Do I anticipate needing these funds soon?
- What are the current interest rate trends?
- What are my tax implications?
Deciding the Best Path Forward
When deciding between short-term and long-term fixed deposits, evaluate your immediate financial goals, liquidity requirements, and the broader market outlook. Short-term FDs cater to those seeking swift access to funds or looking to ride on fluctuating interest rates for better returns. Meanwhile, long-term FDs promise higher returns and stability, supporting plans like long-term investments or retirement savings.
For investors aiming to reap varied benefits, consider a diversified approach. By spreading your investments across both short-term and long-term FDs, you can enjoy the liquidity of one and the higher returns of the other, effectively guarding against market volatility.
Choosing Between Short- and Long-Term FDs
| Factor | Short-Term FDs | Long-Term FDs |
| Best for | Emergency funds, immediate goals | Wealth creation, future planning |
| Interest rates | 3.25% – 6.25% | 6.25% – 7.60% |
| Liquidity | High | Moderate |
| Compounding benefit | Limited | Significant |
| Penalty risk | Low | Higher |
| Reinvestment risk | Higher | Lower |
The decision ultimately depends on your financial timeline and risk tolerance. Short-term goals require predictable access to funds, making lower-yielding but liquid FDs appropriate. Long-term goals can leverage higher rates and compounding for wealth accumulation.
FAQs
1. What Is The Shortest Period For FD?
The shortest period for a Fixed Deposit is 7 days. You can open an FD for 7 days and go up to 10 years, depending on your financial goals. A short-term period is suitable for people who want to park money for a very short time and still earn some interest safely.
2. Are Short-Term FDs Taxed?
Yes, short-term FD interest is taxable. The interest earned is added to your total income and taxed as per your income slab. If the yearly interest exceeds ₹50,000 (₹1,00,000 for senior citizens), TDS is deducted by the bank. You can save this by submitting Form 15G/15H if eligible.
3. Can I Apply For An FD For 1 Month?
Yes, you can open an FD for 1 month (30 days). It’s called a short-term FD and is ideal if you want to earn safe, fixed returns for a brief period.
4. What Is The Minimum Amount Required To Invest In A Short-Term FD?
The minimum amount to invest in a short-term FD is approx. ₹10,000 and for minors, it is approx. ₹2000. It is better to start with a good amount so that you can get high returns in the future.
5. Can Tax-Saver FDs Be Considered As Short-Term FDs?
No, Tax Saver FDs are not short-term. This FD has a 5-year lock-in period and cannot be withdrawn early. It offers income tax benefits under Section 80C (under the Old Tax regime) for up to ₹ 1.5 lakh per year. Short-term FDs, on the other hand, range from 7 days to less than 1 year and offer no tax exemptions under section 80C.
6. Will The Short-Term FD Be Done In 3 Months?
Yes, you can open a short-term FD for 3 months (90 days). It’s a popular option for those who want to park money for a short duration and earn better returns than other savings options. However, the returns may be a bit low for your FD.
7. Which Is The Better Option A Short-Term FD Or A Long-Term FD?
It depends on your financial goal. Short-term FDs are better for quick savings and emergency funds, offering flexibility. Long-term FDs are ideal for future goals, giving higher returns over time. Choose short-term for liquidity and long-term for wealth growth. Both are safe, fixed-return investment options.
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