Corporate Fixed Deposit: Meaning, Eligibility & Advantages

Investing in fixed deposits has been an ideal option for those looking to grow their savings securely and reliably. While bank fixed deposits are known for their safety and stability, corporate fixed deposits (FDs) present a tempting alternative with higher potential returns. Issued by companies and Non-Banking Financial Companies (NBFCs), corporate FDs offer attractive interest rates and support the growth of the organisation. However, it is necessary to grasp the details and risks of corporate FDs to make well-informed investment decisions.

What is a corporate fixed deposit?

Similar to banks, many non-banking financial companies (NBFCs) can accept deposits for a fixed period at a specified interest rate. These deposits are referred to as corporate Fixed Deposits. They offer the same benefits as bank deposits, such as guaranteed returns and the option to select the deposit term. Additionally, corporate FDs often offer higher interest rates compared to bank FDs.

Difference between corporate and bank FDs

Features of corporate FDs

Corporate fixed deposits (FDs) are similar to bank FDs but are issued by non-bank companies to raise funds from the public. They are rated for credibility by rating agencies. Some features of corporate FDs include:

• Eligibility: You must be an Indian resident, but NRIs may be eligible in some cases. You must be at least 18 years old, but minors can open a deposit with a natural guardian. Ensure you fulfil these fixed deposit eligibility criteria.
• Investment amount: The minimum investment is usually Rs.1,000, but there is no maximum limit.
• Interest rate: The interest rate depends on the deposit's tenure and the issuer, but corporate FDs generally offer higher interest rates than bank FDs.
• Tenure: Corporate FDs have adjustable terms ranging from 12 to 60 months.
• FDs can give tax benefits by permitting income deductions under the Income Tax Act of 1961.
• Risk: Because FDs are not market-driven and guarantee a set amount of money at maturity, they are regarded as risk-free. However, the capital in a corporate FD is not protected if the company is unable to meet its financial obligations.

Benefits of corporate fixed deposits

Corporate Fixed Deposits (FDs) offer several advantages, including:

1. Higher Interest Rates: Corporate fixed deposit interest rates are typically higher compared to bank FDs, providing better returns on investment.
2. Flexible Tenures: Investors can choose from various tenure options, allowing them to match their investment horizon and liquidity needs.
3. Guaranteed Returns: Despite being slightly riskier than bank FDs, corporate FDs still offer guaranteed returns, making them a reliable investment option.
4. Diversification: Putting money into corporate FDs enables investors to spread their investments across various asset types, reducing risk.
5. Regular Income: Corporate FDs often provide options for periodic interest payouts (monthly, quarterly, semi-annually, or annually), which can be beneficial for those seeking regular income.
6. No Market Risk: Corporate FDs are not subject to market fluctuations, ensuring stable returns regardless of market conditions.
7. Special Schemes: Companies may offer special schemes with additional benefits such as higher interest rates for senior citizens or additional returns for longer tenure deposits.
8. Simple Process: The process of investing in corporate FDs is straightforward, often requiring minimal documentation and easy application procedures.
9. Cumulative and Non-Cumulative Options: Investors can choose between cumulative FDs (where interest is compounded and paid at maturity) and non-cumulative FDs (where interest is paid out periodically). You may calculate the potential EMIs by using a fixed deposit EMI calculator.
10. Reinvestment Options: Some corporate FDs offer reinvestment options, allowing investors to reinvest their interest earnings, further enhancing their returns through compounding.

Why should you invest in a corporate fixed deposit?

One of the main advantages of investing in corporate FDs is the high interest rate. Companies raise capital from the public to fund their growth, and this growth potential is reflected in the higher interest rates offered to investors. If the company has strong financial stability and a solid financial plan, it makes sense that it will use the capital to expand its operations, leading to a larger company, higher revenue, and increased cash flow in the short term.

As long as the depositor stays informed about the company's financial health and keeps track of its overall status, safety concerns can be minimised. The attractive interest rates offered can help the depositor achieve their financial goals.

Who should invest in a corporate fixed deposit?

A corporate FD can cater to an investor's needs with the option for premature withdrawal, unlike traditional FDs that lock in your investment. However, it's important to note that only some corporate FDs offer this flexibility with minimal conditions.

By investing in a corporate FD, you can choose to receive interest payments at intervals that suit your changing needs, such as monthly, quarterly, semi-annually, or annually.

Before investing in high-return corporate FDs, you should check their credit rating. Lower ratings increase risk, so it's more beneficial to choose high-return corporate FDs with good ratings over those with high returns but lower ratings.

If you're comfortable with taking on more risk, you might still consider investing in corporate FDs. You can diversify your investment across various corporate FDs with high returns and good credit ratings, such as AAA, for better security and returns compared to bank FDs.

Tax implications on corporate fixed deposit

Interest earned from corporate fixed deposits (FDs) is taxable in India at the highest income tax bracket of the deposit holder. However, tax is only due if the yearly interest earnings from the deposit exceed Rs.5,000. If this occurs, a 10% tax deducted at source (TDS) is automatically withheld from the interest to be paid.

Resident individuals can avoid paying TDS by submitting Form 15G (or Form 15H in the case of senior citizens) to the bank or non-banking financial institution (NBFC). This declaration must be submitted in every financial year until maturity. If the interest earned on the FD exceeds the threshold limit and the PAN details are not shared with the bank or NBFC, the TDS to be deducted doubles to 20%.

Setting financial goals is essential for healthy financial growth. Look out for the best corporate FD rates before investing in Fixed Deposits ensuring safety and guaranteed returns. Informed investors can use Corporate Fixed Deposits to maximise their earnings from a Fixed Deposit. By conducting basic fundamental analysis and checking credit ratings, investors can confidently and safely invest in Corporate FDs.

This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.