Corporate Fixed Deposits: A Smart Investment Option In India

Corporate fixed deposits are a type of term deposit offered by financial institutions, including non-banking financial companies (NBFCs), providing a fixed interest rate for a set period. They are a popular investment option in India as they offer higher interest rates than regular bank fixed deposits. The maturities of corporate fixed deposits can range from a few months to a few years, and they are ideal for those with short-term financial goals. When choosing a corporate fixed deposit, it is important to consider the company's background, repayment history, and credit rating.

How to choose a corporate fixed deposit

When choosing a corporate fixed deposit, it is important to consider several factors to ensure the safety of your investment and maximise returns. Here are some key considerations to help you make an informed decision:

Credit Rating

The credit rating of a corporate fixed deposit is a crucial factor in assessing its safety and stability. Reputable credit rating agencies such as CRISIL, ICRA, and CARE assign ratings to indicate the risk level associated with the investment. A higher rating signifies lower risk and higher safety. It is advisable to opt for corporate fixed deposits with AAA or equivalent ratings, which represent the highest safety regarding payment of interest and principal.

Company Background and Reputation

It is essential to research the company's background, including its financial statements, management discussion, and analysis. Look for companies with a strong track record of profitability, timely repayment history, and a good reputation in the market. Assess their business viability and stability to ensure your investment is secure.

Interest Rates

Compare the interest rates offered by different companies for similar tenures. Corporate fixed deposits typically offer higher interest rates than bank fixed deposits, but it is still important to evaluate the rates to get the best returns on your investment.

Tenure Options

Corporate fixed deposits can have varying tenures, ranging from a few months to several years. Choose a tenure that aligns with your investment goals and financial plans. Consider the minimum and maximum deposit amounts required by different companies and select one that matches your budget and needs.

Withdrawal Terms

Review the withdrawal terms and conditions offered by the company. Some corporate fixed deposits may have a lock-in period or penalties for premature withdrawal. Understand the flexibility you have in accessing your funds before making a commitment.

Tax Implications

Interest earned on corporate fixed deposits is subject to income tax. Be sure to consider the tax implications based on your tax bracket and understand any Tax Deducted at Source (TDS) requirements. You may need to submit specific forms to avoid TDS deductions, depending on your circumstances.

By carefully considering these factors, you can make an informed decision when choosing a corporate fixed deposit that suits your investment needs and financial goals while minimising potential risks.

Benefits of investing in a corporate fixed deposit

Corporate fixed deposits are becoming an increasingly popular investment option in India. Here are some of the benefits of investing in a corporate fixed deposit:

Higher Interest Rates

Corporate fixed deposits offer higher interest rates compared to bank fixed deposits. The difference in interest rates between regular bank FDs and corporate FDs can be significant, generally ranging from 1% to 3%. This means that, over time, you can earn a higher income from your investment. For example, corporate deposits offer FD interest rates of 7.85% for new customers, 7.95% for existing customers, and up to 8.1% for senior citizens, while the State Bank of India provides deposit interest rates between 5.5% and 7%.

Flexibility of Tenure

Corporate fixed deposits offer flexibility in terms of tenure, ranging from 12 to 60 months. This allows you to choose a period that aligns with your investment goals, whether you are saving for a short-term goal or building a long-term corpus.

Credit Rating Safety

Reputable credit rating agencies like CRISIL, ICRA, and CARE evaluate the financial health of companies offering corporate fixed deposits. These agencies assign ratings, such as AAA or equivalent, which indicate the safety and stability of the investment. A company with a high credit rating is more likely to guarantee returns and timely interest payments, even during market fluctuations.

Liquidity and Lower Lock-in Periods

Corporate fixed deposits often provide better liquidity than bank FDs due to their lower lock-in periods. This means you may have easier access to your funds in case of an emergency or other financial needs.

Flexibility in Interest Payment

Corporate fixed deposits offer flexibility in how interest is paid out. You can choose from various options, such as monthly, quarterly, half-yearly, or yearly payouts, to suit your preferences and financial goals.

Added Incentives

Some companies provide added incentives, such as slightly higher interest rates upon renewal of the fixed deposit. This can further increase your overall returns.

Overall, investing in a corporate fixed deposit offers advantages such as higher interest rates, flexibility in tenure and interest payment options, and the assurance of credit rating agencies. However, it's important to carefully research and assess the credibility and financial history of the company before investing.

Eligibility criteria for a corporate fixed deposit

To be eligible to apply for a corporate fixed deposit in India, you must meet the following criteria:

• Be above the age of 18.
• If you are a minor, you can open an account with a guardian.
• Be a resident or non-resident Indian (NRI).
• Be a member of a Hindu Undivided Family (HUF).
• Represent an educational institution or partnership company.

To open a corporate fixed deposit account, you will typically need to provide the following documents:

• A valid employee's ID.
• Government-validated address proof.
• Two colour passport-sized photographs.

Documents required for a corporate fixed deposit

To open a corporate fixed deposit account in India, individuals will need to submit the following documents:

• A valid employee's ID
• Government-validated address proof
• 2 colour passport-sized photographs

In addition to the above, Hindu Undivided Families (HUFs) will need to submit a HUF declaration and deed, while educational institutions will need to submit a registration certificate.

Tax implications of a corporate fixed deposit

The interest earned from corporate fixed deposits is subject to taxation based on the investor's income tax bracket. For instance, if an investor falls under the 30% tax bracket, they will pay 30% tax on the interest earned from their corporate fixed deposit. According to the Income Tax Act, if the interest earned in a financial year exceeds Rs. 5,000, TDS (Tax Deducted at Source) will be deducted. However, investors can avoid TDS by submitting Form 15G (or Form 15H for senior citizens) to the bank or non-banking financial institution.

The interest income earned from corporate fixed deposits is taxed as per the tax slab of the depositor. This means that the applicable income tax rate will be applied to the interest earned, and the depositor will be responsible for paying the tax. The specific tax implications may vary depending on the individual's circumstances and the regulations in India.

It is important to note that corporate fixed deposits are not covered by the DICGC (Deposit Insurance and Credit Guarantee Corporation), an RBI subsidiary, unlike fixed deposits in scheduled banks. This means that there is no deposit insurance coverage for corporate fixed deposits, and investors bear a higher risk in case of default or financial institution failure.

When considering corporate fixed deposits, it is crucial to assess the credibility and financial health of the issuing company. Recognized credit rating agencies, such as CRISIL, ICRA, and CARE, provide ratings that indicate the safety and risk of default associated with the investment. A higher rating generally signifies lower risk and higher safety for investors.

Frequently asked questions