When deciding between a 1-year FD and a 3-year FD, several factors affect which option is more profitable:
1. Interest Rates
Typically, longer-term FDs offer higher interest rates.
A 3-year FD often gives slightly higher rates than a 1-year FD, but the difference depends on the bank or financial institution.
Example (illustrative):
1-year FD: 6.5% per annum
3-year FD: 7.0% per annum
2. Compounding Frequency
FDs usually compound quarterly, monthly, or annually, which impacts total returns.
Longer tenure + quarterly compounding → more benefit
Shorter tenure + lower rate → less benefit
Formula:
A=P×(1+rn)n×tA = P \times \left(1 + \frac{r}{n}\right)^{n \times t}A=P×(1+nr)n×t
Where:
AAA = maturity amount
PPP = principal
rrr = annual interest rate (decimal)
nnn = number of compounding periods per year
ttt = tenure in years
3. Liquidity
1-year FD: More liquid. You can access funds sooner without much interest loss.
3-year FD: Less liquid. Premature withdrawal may reduce interest or incur penalties.
4. Interest Rate Trends
If interest rates are rising, a shorter-term FD may allow you to reinvest at higher rates later.
If rates are stable or falling, locking in a longer-term FD is better.
5. Tax Considerations
Interest earned on FDs is taxable as per your income slab.
Longer-term FDs accumulate more interest → higher tax liability.
6. Which Option Gives More Benefit?
Purely in terms of interest earned: 3-year FD usually gives more total interest.
Considering flexibility and risk: 1-year FD may be better if you anticipate needing the money or expect rising rates.
Quick Tip
If your goal is maximum returns and you don’t need liquidity, go for the longer-term FD.
If your goal is flexibility or reinvesting at higher rates later, choose the shorter-term FD.
Disclaimer:
The views and opinions expressed in this article are those of the author and do not necessarily reflect the official policy or position of any agency, organization, employer, or company. All information provided is for general informational purposes only. While every effort has been made to ensure accuracy, we make no representations or warranties of any kind, express or implied, about the completeness, reliability, or suitability of the information contained herein. Readers are advised to verify facts and seek professional advice where necessary. Any reliance placed on such information is strictly at the reader’s own risk.
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