Given below are comparisons between bank fixed deposits and corporate fixed deposits:
Meaning of bank fixed deposits, corporate fixed deposits
Bank fixed deposits are offered by banks. Usually, interest rates offered on bank fixed deposit accounts are higher than those on savings bank accounts.
Corporate fixed deposits are offered by companies. When companies need to raise cash in a hurry they offer fixed deposits at attractive interest rates. Investors are issued deposit certificates of different tenures at fixed interest rates.
Interest rates on bank fixed deposits, corporate fixed deposits
Banks like State Bank of India (SBI), HDFC Bank, ICICI Bank, Axis Bank and Punjab National Bank offer fixed deposit interest rates up to 7 per cent. Small finance banks like Fincare Small Finance Bank, AU Small Finance Bank, Ujjivan Small Finance Bank and Equitas Small Finance Bank offer fixed deposit interest rates up to 9 per cent. Senior citizen interest rates on bank fixed deposits are higher than those for people under 60 years of age. The interest rates vary according to tenures.
Companies that have high ratings offer interest rates on different tenures of corporate fixed deposits of 1-5 Year tenure. The interest rates varies from 9.25 per cent - 10.75 per cent depending on the tenure. Companies with a lower rating offer higher interest rates than the highly rated ones to make up for the default risk.
However, experts suggest that companies which offer fixed deposit interest rates close to 15 per cent per annum should be avoided. "Many new companies and those with an uncertain future regarding future policy offer interest higher than 12 per cent. These need to be viewed with caution. Companies do not need to be mandatorily rated. Even if they do, disclosure of the rating is up to the company. However, companies with good ratings can easily obtain deposits from the public," said Rakesh Singh, Retail Head, SVC Bank.
Risks associated with bank fixed deposits, corporate fixed deposits
Bank fixed deposits are secured by Reserve Bank of India up to Rs 1 lakh, which means that each depositor will get this sum if a bank goes bankrupt or does not pay back one's money.
However, corporate fixed deposits do not offer any such security. The company might suffer heavy losses and be out of funds. It might default on interest payments and might not return the mature amount. Thus, this makes corporate fixed deposits a very risky investment. In order to compensate this risk, companies offer higher interest rates on fixed deposits than banks. The higher the credit risk, the greater is the interest rate offered.
"Corporate fixed deposit scores higher than bank deposits given the equivalent credit rating and higher rate of interest. But customers must ensure that they invest in high-rated corporate deposit with AAA or equivalent rating, and avoid choosing low-credit rating company," said Dinesh Rohira, Founder and CEO, 5nance.com.
Taxation on bank fixed deposits, corporate fixed deposits
Bank fixed deposits with lock-in periods of five or ten years offer income tax benefit under Section 80C of the Income Tax Act. However, they cannot be withdrawn before the lock-in period. Bank fixed deposits with premature withdrawal facility do not offer any tax benefits. If the interest income on bank fixed deposits exceeds Rs 10,000 in a year, banks deduct tax at source.
"Bank FDs are recommended as tax-saving FDs, which generally come with a five-year lock-in-period, give taxpayers the benefit of Section 80C. Further, senior citizens enjoy an exemption up to Rs 50,000 from the interest they receive from FDs. Corporate FDs do not entitle investors to these benefits," said Archit Gupta, Founder & CEO ClearTax.
|Bank fixed deposit||Corporate fixed deposit|
|Offered by||Bank||Corporate Company|
|Rate of interest||Average||High|
|Tenure period||Ranges from months to years||6 months to 3 years|
|Medium of investment||Certificate of deposit||Certificate of deposit|
"All fixed deposits (including bank fixed deposits) are taxed at the highest income tax bracket of the person," said Bharat Ravuri, CEO, MintZip. So, any returns being considered have to factor in the tax that you need to pay.
Premature withdrawal on bank fixed deposits, corporate fixed deposits
A bank fixed deposit can be withdrawn prematurely by paying a penalty of around 2 per cent on the interest rate accrued.
Some corporate fixed deposits do not allow premature withdrawal for a period of three-six months. If premature withdrawal is made, no interest accrues on the deposit. On premature withdrawal after six-twelve months, certain companies deduct around 2-3 per cent on the interest rate offered.
(Also Read: Five Tempting Short-Term Investment Options To Choose From)
What should be your pick: bank fixed deposits or corporate fixed deposits?
"Investing in a corporate fixed deposit of a short tenure is the way to go rather than invest in deposits of a longer tenure. One does not know what the business cycle (of the company) would be over a longer period of time and deposits of a shorter tenure are generally safer to invest in. However, one should avoid deposits in companies about which one knows little...They certainly come nowhere near the ease and comfort of a bank fixed deposit. A through research is necessary to invest in a corporate fixed deposit in order to gainfully profit from the higher interest rates offered," said Mr Singh.
Mr Ravuri, in fact, has a smart advice. "If you plan to invest in an FD, it is better to invest it in a non-earning family member's name so that tax component can be better optimised," he said.
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