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In India, deposits can be broadly classified into 2 different categories - time deposits and demand deposits. Each type of deposit account is unique and serves different financial purposes. Demand deposits offer greater liquidity but lower interest rates, while time deposits offer lower liquidity but higher interest rates. So, a careful analysis of their key differences can help you make an informed financial decision. ...Read More
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Written bySumit Narula
Investment Writer
Published 17th February 2026
Reviewed byPrateek Pandey
Last Modified 17th February 2026
Investment Expert
What is a Demand Deposit?
Demand deposits are a type of bank account that offers high liquidity, the depositor can withdraw the money easily. This makes demand deposits easily accessible and a highly liquid type of account. The best example of a demand deposit is a savings account or a current account, where you can withdraw the money as and when required.
Demand deposit withdrawals can be done through different ways such as cheques, online transfers, debit cards, cash withdrawals at a bank branch, etc. So demand deposit accounts can be used for various day-to-day transactions and short-term savings. However, the interest rate on demand deposits is often quite low.
Key Features of Demand Deposits
Below are some of key features of a demand deposit account:
- Liquidity: A demand deposit account allows withdrawals at any time. Moreover, in most cases, there is no restriction on the withdrawal amount. This ensures a high degree of liquidity and makes them a suitable instrument for maintaining an emergeny fund.
- Assured Returns: Demand deposits such as savings accounts offer assured returns at a pre-determined guaranteed interest rate. However, current accounts in India often do not offer any returns to the depositor.
- Minimum Balance Requirements: Some banks require customers to maintain a minimum balance in their account on a daily, monthly or quarterly basis. However, the amount required to be maintained as minimum balance in the demand deposit account differs based on the type of account chosen.
- Joint Account: There is an option to create a joint account with two or more individuals as co-depositors. In the case of such a joint account, all joint-holders have the right to deposit and withdraw funds from the demand account.
- Daily Needs: A demand deposit account allows withdrawals to be made through various instruments such as debit/ATM card, cash withdrawal at bank branch, cheque, online transfers, UPI, etc. This makes demand deposits ideal for meeting daily financial needs, as the funds can be easily transferred or withdrawn.
What is a Time Deposit?
Time deposits, also known as term deposit offer assured returns at a predetermined interest rate and are made for a pre-determined period of time. These accounts are offered by private and public sector banks, non-banking financial companies (NBFCs), housing financial companies (HFCs), India Post Office, etc. As per RBI data, term deposits accounted for 59.5% of all deposits as of March 2025.
Common types of term deposits available in India are fixed deposits and recurring deposits. Such deposits offer a fixed interest rate that is higher than that of a demand deposit account. However, funds invested in time deposits are not liquid, as investors can withdraw them only after the fixed deposit's tenure ends or with penalties if the deposit is withdrawn earlier.
Key Features of Time Deposits
Some of the key characteristics of time deposits are:
- Lower Liquidity: Term deposits are less liquid than demand deposits, as investors cannot withdraw funds freely before the deposit term ends. Premature withdrawal from a term deposit is usually allowed with applicable penalties.
- High Interest Rates: Time deposits typically offer higher interest rates than demand deposits. Moreover, senior citizens receive slightly higher returns than the general population.
The exact rate of interest offered by a term deposit can vary based on the tenure, type of demand deposit as well as the financial institution offering the deposit. As per RBI data released in September 2025, 64% of newly contracted deposits offered interest rate of term deposits offering interest rate less than 7% p.a. - Flexibility: Investors can withdraw their funds at maturity or reinvest for another term deposit without restrictions. This means that the amount received at maturity can be freely used for achieving various financial goals.
- Investment Tenure: Time deposits usually have investment tenures ranging from 7 days to 10 years. This provides depositor a high degree of flexibility when choosing a term deposit tenure that suits their financial needs.
- Easy Availability: Time deposits are offered by a wide range of financial instritutions including banks (including private sector, public sector, co-operative, small payments banks, etc.), India Post Office, Non-Banking Financial Institutions (NBFCs), and Housing Finance Companies (HFCs), etc.
- Low Risk: Term deposits made with scheduled banks in India are guarateed up to ₹5 lakh by DIGC, a Government of India approved agency. On the other hand, credit rating agencies agencies such as CRISIL and ICRA provide risk rating so that the depositor knows the potential risk before making the deposit.
- Tax Benefits: Tax deductions benefits are available for tax saving fixed deposits under Section 80C of the Income Tax Act. However, this is only available if you are filing taxes under the old regime. However, interest earned from term deposits are fully taxable as per the income tax slab rate of the depositor.
- Loan Features: Loans against time deposits use the amount deposited in the account as collateral. These secured loans are offered at interest rates linked to the interest rate of the term deposit. This provides easy access to cash in an emergency without the depositor having to pay penalties for premature withdrawal.
Key Differences Between Time Deposits and Demand Deposits
The below table illustrates the key difference between time deposits and demand deposits to help you make an informed choice:
| Comparison Criteria | Demand Deposit | Time Deposit |
|---|---|---|
| Type of Deposit | It is a type of bank account that offers high liquidity. | A type of account where individuals deposit funds for a specific period of time. |
| Withdrawal Rules | These are highly liquid, and funds can be withdrawn at any time without penalties. | Depositor can make complete withdrawal with interest at maturity. Fund withdrawals before maturity may incur penalties. |
| Interest Rates | Comparatively low interest rates | Offers higher interest rates than demand deposits |
| Purpose | Ideal for meeting cash requirements for daily expenses. | Suitable for long-term investment and wealth creation. |
| Maturity | No fixed maturity time period. The deposit can be held indefinitely. | Fixed maturity period specified at the time of opening the account. |
| Interest Calculation | Interest is typically calculated on daily balance and credited on quarterlty basis. | Interest is calculated on the amount deposited on a monthly, quarterly, bi-annual or annual basis. Interest may be credited either periodically or at maturity. |
| Accessibility | Funds are accessible via cheques, debit cards, UPI, cash withdrawal at branch, etc. | Withdrawals can be made only after initiatiating a premature withdrawal request. |
| Suitable For | Individuals requiring liquid assets. | Individuals looking for better interest and long term growth of deposits. |
How Do Time Deposits & Demand Deposits Work?
In order to gain insight into whether a term deposit or demand deposit suits your financial need, it is important to understand how these deposits work.
Here is how a time deposit works:
- Step 1: The depositor/depositors selects the preferred bank to open their time deposit account. This can be based on availability or the high interest rate offered by a specific financial institution.
- Step 2: The depositor/depositors can choose the type and tenure of the term deposit. This can impact the interst rate and the funding needs of the term deposit.
- Step 3: The depositor makes a single lump sum deposit at the time of account opening or periodic payments, depending on the type of term deposit chosen. The deposit/deposits are held for the contracted period.Step 4:
- Step 4: After the maturity of the time deposit account, the investor can withdraw the funds, including the interest earned. The interest earned may be subject to TDS on FD at the applicable rate.
The below steps discuss how a demand deposit in India works:
- An individual opens a demand deposit account in their preferred bank or financial institution. Available options include savings account or current account. Current accounts in India do not offer interest payouts, while savings account provide interest to the depositor.
- The person can deposit money into the demand deposit account at their discretion. However, some demand deposit accounts require individuals to maintain a specific minimum balance on daily, monthly or quarterly basis.
- The money deposited in the demand deposit earns interest at the applicable rate. The interest is usually calculated on a daily basis based on the account balance maintained. The interest earned is usually credited on a quarterly or monthly basis.
Time Deposit vs Demand Deposit: Which Should You Choose?
The choice between time deposit and demand deposit for a depositor can be based on few key factors:
- Desired Returns: Typically term deposits offer a higher rate of interest as compared to demand deposits. So, if a depositor desires higher assured returns from their deposits, a term deposit is the preferred choice.
- Liquidity Needs: Demand deposits offer higher liquidity to depositors compared to term deposits. So, depositors prioritising easy accesibility to their money would prefer to deposit their money in a demand deposit instead of a term deposit.
- Financial Goals: Depositors seeking to maintain cash reserves for emergencies, would prefer easy access to their money. So, a demand deposit is the preferable option. On the other hand, depositors seeking long-term wealth creation would prefer to opt for the higher interest rate offered by term deposits such as fixed deposits and recurring deposits.
- Tax Saving Needs: In most cases, the interest earned from demand deposits and term deposits are taxable as per the income tax slab rate of the depositor and offer no tax deduction benefit. The only exception to this are 5 year tax saver fixed deposits that offer tax deduction benefits under Section 80C, if the depositor has opted for the old tax regime. So, if you are seeking tax benefits with wealth creation, this specific time deposit is the only option.
Pros & Cons of Demand Deposit & Time Deposit
Before choosing between demand deposits and term deposits, it is essential to understand the pros and cons of both account types.
Advantages of Demand Deposit
Here are some of the essential advantages of a demand deposit account:
- Accessibility: Funds in the demand deposit are instantly accessible and can be withdrawn at any time on demand. Moreover, you do not need to notify the bank or seek approval to withdraw funds.
- Joint Account: Individuals can open joint accounts that allow two or more people to operate the same account. Joint holders can freely make deposits and withdrawals from the demand deposit unless specific restrictions are made.
- Easy Transactions: The bank allows you to have a considerable number of transactions. In the case of savings account, deposits/withdrawals made beyond a specific limit over a pre-determined period are not allowed or chargeable. No such limitations are applicable to current account.
- Simplified Transfers: Depositors can initiate electronic or offline transfer of deposits as per requirement. Available options to make such withdrawals/transfers include UPI, netbanking, cash withdrawals at ATM or branch, cheque-based transfers, etc.
Limitations of Demand Deposit
Although demand deposits offer several benefits, they come with a few limitations, which are as follows:
- Low Interest Rate: Demand deposits often offer lower interest rate compared to time deposits because of their relatively high liquidity.
- Service Fees and Minimum Balance: Banks usually charge a fixed fee for services to their customers. But, typically a minimum balance needs to be maintained in the case of some demand account. Penal charges are applicable if the required minimum balance is not maintained.
Advantages of Time Deposit
Given below are some of the benefits of a time deposit:
- Assured Returns: Time deposits offer assured returns, as they do not depend on market fluctuations. This ensures predictability of the maturity amount that the depositor will receive at the time of maturity.
- Flexible Interest Credits:
- Tax Benefits: Tax deductions are available for investment plans such as tax-saving FD for up to ₹1.5 lakh in a financial year (only available under the old regime). Other types of term deposits currently do not offer this benefit.
- Safe Investments: Time deposits are a safe investment option because financial institutions are subject to oversight by the Reserve Bank of India (RBI). Moreover, funds in time deposits are insured by DICGC, a government approved body up to an amount of ₹5 lakh (for both the principal and interest amounts).
Limitations of Time Deposits
Here are some key drawbacks of a time deposit:
- Low Liquidity: A time deposit is made for a specific duration, and withdrawals before maturity incur a penalty. This limits the liquidity of this type of deposit.
- Taxable Returns: Time deposit interest earnings are taxable as per the income tax slab of the depositor. A five-year tax saver time deposit account can help save tax under the old tax regime. However, its returns are taxable as per the same income tax rules as other time deposits.
How to Use Time and Demand Deposits for Your Financial Goals?
According to the Reserve Bank of India (RBI), 70% of urban investors in India rely on demand deposit accounts for day-to-day expenses, while 40% of retail banking assets are in fixed deposits. A careful analysis of the technical differences and return potential will help you make a wise decision that aligns with your financial goals.
1. Alignment With Financial Goals
Comparing interest rates offered by time and demand deposits helps you analyse their alignment with your financial goals. The potentially higher interest rate offered by term deposits compared to demand deposits makes the former ideal to achieve long-term goals. Demand deposits, on the other hand, may be ideal for creating an emergency corpus due to their higher liquidity.
2. Liquidity Analysis
A demand deposit will be useful in achieving your financial aspirations in case you are seeking to find very liquid assets to support your daily spending needs. Meanwhile, when you need to plan long-term investments like your daughter’s marriage, then you need to take a time deposit, as it gives better returns.
3. Risk Assessment
The Deposit Insurance and Credit Guarantee Corporation (DICGC) provides coverage for time and demand deposits up to ₹5 lakh per depositor per bank, thereby safeguarding people. However, consider risk factors such as inflation risk, where fixed deposits might not beat inflation, and liquidity risk, in which fixed deposits limit access to funds. Carefully analyse the risk factors involved with both types of deposits and choose the one that aligns with your financial goals.
4. Balanced Approach to Manage Funds
The best strategy to manage funds in different deposits is a balanced approach to select both time deposits and demand deposits in the following ways:
- Emergency Fund Strategy: You can choose a demand deposit to maintain 6-12 months of expenses for better liquidity and invest the surplus funds in fixed deposits for long-term investment and better returns.
- Goal-Based Approach: Select demand deposits when you have a short-term objective (1 year or less) and time deposits when you have a medium-term objective (1-5 years) to achieve your financial goals.
- Laddering Method: Invest in multiple time deposits to balance returns and maintain liquidity across deposits. This will ensure that you have cash readily available when needed without having the make premature withdrawals from existing term deposits.
Ideally, it is suggested that one diversify holding across multiple types of deposits and investment options, instead of relying on any specific financial instrument. This can help provide a balance between liquidity, returns and other factors that you need to consider in order to reach your financial goals.
Common Mistakes to Avoid When Choosing Between These Accounts
Some of the common mistakes that should be avoided when choosing the correct deposit account are explained as follows:
- Not Considering Liquidity: Demand deposits are highly liquid, while time deposits are less liquid. Failure to consider liquidity needs can lead an investor to choose the wrong account, which can impact access to funds and returns.
- Ignoring Interest Rates: Interest rates on demand deposits are usually lower than that offered by time deposits. Moreover, interest rates vary based on financial institution and the tenure chosen, which can impact the growth of your deposits. So, missing this key detail is a mistake that can result in you missing your financial goal.
- Not Assessing Minimum Deposits: Demand deposits and time deposits often have minimum deposit requirements. Not properly assessing the minimum deposit can lead to issues when you need to maintain a specific amount of funds for the account to function without penalties.
- Improper Goal Assessment: Demand deposits are suitable for daily expenses, while time deposits are better suited for long-term savings. Improper assessment of the goals may lead to problems in reaching them within the desired time period. So while you can use some types of term deposits for retirement planning , the same might not work with a demand deposit.
FAQs about Time Deposit and Demand Deposit
What is the difference between a demand deposit and a time deposit?
Demand and time deposits primarily differ in terms of the interest rates and liquidity they offer. Demand deposits offer high liquidity but have low interest returns, while time deposits are less liquid and offer higher interest returns.
Which type of account offers higher interest: demand deposit or time deposit?
The time deposit accounts usually offer higher interest rates as compared to the demand deposits. However the rates vary based on the financial institution offering the deposit and the tenure chosen.
Can I withdraw money from a time deposit before maturity?
Yes, it is possible to make withdrawals from a time deposit before maturity. However, this results in a premature withdrawal penalty and lower interest rate than the contracted rate.
What are typical examples of demand deposit accounts?
Some of the examples of demand deposit accounts in India are savings accounts and current accounts. While these types of accounts have many similar features, they do have significant differences which makes them suitable for different uses.
Is a fixed deposit the same as a time deposit?
Fixed deposits are a type of time deposit. They are deposits that are made for a predetermined period. Another common type of term deposit in India are recurring deposits.
Which account should I use for an emergency fund?
Demand deposits such as savings accounts and current accounts offer a high level of liquidity. This makes these deposits ideal for maintaining emergency funds that require quick access to cash.
Does the tenure of a time deposit affect the interest rate?
Yes, the tenure of a time deposit affects the interest rates. Up to a specified limit, the longer the tenure, the higher the interest rate offered.
What factors should I consider when choosing between a demand deposit and a time deposit?
Careful analysis of the individual's financial needs, such as liquidity, capital appreciation requirement, the intended duration of savings, etc. determines which deposit type should be chosen.
Can you make more than one deposit with a bank branch?
Yes, customers are eligible to open multiple types of deposit accounts and also multiple accounts of the same type at the same bank branch. However, some types of accounts such as Jan Dhan account, PPF account, etc. may have unique restrictions limiting the number of accounts that can be opened.
How do demand deposits and time deposits differ in terms of liquidity?
Demand deposits are highly liquid, as they allow immediate access to funds through different means. In contrast, time deposits are less liquid, as premature withdrawals are allowed only with applicable penalties.
Are the interest rates offered on demand deposits and time deposits the same?
No, the interest rates offered on demand deposits are not the same as those on time deposits. Time deposits typically offer a higher interest rate than demand deposits.
Can you explain the maturity period for both demand deposits and time deposits?
Demand deposits have no maturity period, while time deposits have a fixed maturity period. The maturity period of time deposits can range from a few days to years.
ARN: Feb26/Bg/08H
Sources:
https://navi.com/blog/demand-deposit
https://www.angelone.in/finance-wiki/bank-deposits/demand-deposits
https://www.wintwealth.com/blog/demand-deposit-account-meaning-features-and-benefits/
https://cleartax.in/s/fd-fixed-deposits
https://economictimes.indiatimes.com/industry/banking/finance/banking/bank-deposits-grew-by-10-in-fy25-growth-decline-from-13-recorded-in-fy24-rbi-data/articleshow/121566544.cms?from=mdr
https://navi.com/blog/demand-deposit
https://www.angelone.in/finance-wiki/bank-deposits/demand-deposits
https://www.wintwealth.com/blog/demand-deposit-account-meaning-features-and-benefits/
https://cleartax.in/s/fd-fixed-deposits
https://economictimes.indiatimes.com/industry/banking/finance/banking/bank-deposits-grew-by-10-in-fy25-growth-decline-from-13-recorded-in-fy24-rbi-data/articleshow/121566544.cms?from=mdr
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