What is a term deposit? A simple guide with examples

What is a term deposit?

A term deposit is a savings product where you hand a bank an amount for a fixed period, say 6, 12 or 24 months, at an interest rate known up front. At the end of the term you get your capital back plus interest. It is one of the most widely used capital-guaranteed products in Portugal, precisely because there are no surprises: you know from the start how much it will earn.

The advertised rate is the gross annual nominal rate (TANB in Portuguese). It is gross because it does not yet deduct the tax, and that is where many people slip up when comparing products.

How does a term deposit work?

The mechanism is simple:

• You hand over an amount (the capital) to the bank.
• The bank applies the gross rate over the agreed term.
• At maturity, it returns the capital and pays the interest.

Gross interest is pro-rated for the term: the rate is annual, so a term shorter than a year earns the corresponding fraction. The formula our term deposit calculator applies is:

Gross interest = Amount × gross rate × (months ÷ 12)

Some deposits allow automatic renewal at the end of the term, and others allow early withdrawal, usually at the cost of part of the interest. Always check these conditions in the standardised information sheet before subscribing.

Is term deposit interest taxed?

Yes, and this is the point that most changes the maths. Deposit interest is capital income (IRS Category E) and is taxed at source at 28%, the so-called withholding rate, on the mainland¹. The bank withholds the tax and credits you the interest net, so in most cases you do not even need to declare it on your IRS return.

So when comparing products, always look at the net interest:

Net interest = Gross interest × (1 − 0.28)

A 3% gross rate corresponds, in practice, to about 2.16% net. Madeira and the Azores apply reduced rates, and there is also the option of tax aggregation on the IRS return, which only pays off if your bracket rate is below 28%.

Gross vs net rate: the rate advertised and the rate you receive

Two figures get mixed up with term deposits. The gross annual nominal rate (TANB in Portuguese) is the advertised rate, before tax, the one shown prominently in adverts. The net annual nominal rate (TANL) is the same rate after the 28% tax, and it reflects what actually lands in your pocket³.

A gross rate of 3% corresponds to a net rate of about 2.16%. When comparing offers from different banks, make sure you compare like with like, gross against gross, or net against net. Comparing one bank's gross rate with another's net rate is an easy mistake to make, and it completely distorts the decision.

Is the money in a term deposit guaranteed?

The capital of a traditional deposit is covered by the Deposit Guarantee Fund up to €100,000 per holder and per institution, even if the bank becomes insolvent². It is one of the reasons a term deposit is seen as a low-risk option. Note: the limit is per bank, so amounts above €100,000 at a single institution are partly unprotected.

Worked example

Imagine €10,000 at a gross rate of 3% for 12 months:

• Gross interest: €10,000 × 3% × (12 ÷ 12) = €300
• Tax (28%): €300 × 0.28 = €84
• Net interest: €300 − €84 = €216
• Value at maturity: €10,216

For a 6-month term, the gross interest would be half (€150) and the net about €108. You can try your own numbers in the term deposit simulator and see the net figure straight away.

Term deposits and compound interest

In a simple term deposit, interest is paid at the end and does not earn on itself during the term. But if you renew the deposit and reinvest both capital and interest, you enter compounding, the effect of compound interest. Over long horizons, reinvesting the interest makes a real difference versus withdrawing it at each maturity. To see that effect, compare with the compound interest calculator or look at how simple interest behaves.

Term deposit or savings certificates?

For anyone after guaranteed capital, the term deposit competes directly with Certificados de Aforro, Portugal's State savings product. The essential differences:

• Term and flexibility: a deposit has short, fixed terms (6, 12, 24 months); certificates run up to 15 years and can be redeemed from the third month.
• Compounding: in a simple deposit, interest is paid at the end; in certificates it compounds quarterly, earning on itself.
• Premium: certificates add a permanence premium that grows over the years, a long-term advantage the deposit does not have.

The honest rule is the usual one: compare the net value of both options for the same amount and term. Run the numbers in the term deposit calculator and the savings certificates calculator.

The deposit-ladder strategy

One of the dilemmas of a term deposit is the trade-off between term and liquidity: longer terms usually pay more, but they tie your money up for longer. A deposit ladder (laddering) is a simple way to balance the two.

Instead of putting everything into a single 24-month deposit, you split the amount across several deposits with staggered terms, say 6, 12, 18 and 24 months. That way there is always a deposit maturing in the short term (liquidity), while the rest keep earning at the longer rates. As each one matures, you can withdraw it if you need to or roll it over into the longest rung of the ladder. It is a technique for people who want safety without giving up all access to their money.

Is a term deposit worth it?

It depends on your goal and horizon:

• For: guaranteed capital, a known rate, money available in the short term.
• Against: inflation can erode the real return. If a deposit earns 2.16% net and inflation is 2%, the real gain is almost nil.

It is a good option for money you do not want to risk and may need soon. For long-term goals, it is worth comparing it with other products, always weighing the risk you are willing to take³.

Term deposit, savings account or current account?

It is easy to confuse three different products:

• A current account is your day-to-day account. The money is always available, but it generally earns no interest (or next to none).
• A savings account lets you pay in and withdraw more freely than a term deposit, but usually offers a lower rate.
• A term deposit locks your money up for a set period in exchange for a more attractive rate known up front.

The choice comes down to the balance between liquidity (access to your money) and return. For an emergency fund you might need at any moment, flexibility matters more; for savings you won't touch for months, a term deposit tends to pay more.

Common mistakes to avoid

• Comparing gross rates between banks and forgetting that the 28% tax reduces the return.
• Assuming the full annual rate on a short term, interest is pro-rated for the period.
• Concentrating more than €100,000 at a single bank, exceeding the deposit guarantee.
• Ignoring early-withdrawal conditions and losing interest by withdrawing before maturity.