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Fixed deposits (FDs) are savings instruments that offer attractive interest rates for a particular amount of money that is invested for a fixed period of time.

Fixed deposits are offered by both banks and companies. Thus, bank fixed deposits and corporate fixed deposits are the two types of fixed deposits. People, however, usually know about bank fixed deposits only. Besides, bank fixed deposits, these days, can be created only with a click. Banks have made it so easy to create fixed deposits that people often think of investing in them for the sole purpose of convenience. But what are corporate fixed deposits?

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.

Corporate fixed depositstend to deduct the TDS (tax deducted at source) if the annual interest exceeds Rs. 5,000. There is no capital gains tax on these deposits.

"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 depositCorporate fixed deposit
Offered by Bank Corporate Company
Rate of interest Average High
Tenure period Ranges from months to years 6 months to 3 years
Risk involved Low High
Medium of investment Certificate of deposit Certificate of deposit

(As told by Mr Singh, SVC Bank)

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.

Last modified on Friday, 22 June 2018

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