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Fixed deposits (FDs) are the first investment many people think of when they want to earn interest without following the stock market every day. Apart from banks, companies and Non-Banking Financial Companies (NBFCs) also accept deposits and offer higher interest rates. These are called corporate FDs. The higher interest rates may also come with additional risks that investors should consider.
So, what makes corporate FDs different and why might investors consider them? Let us find out.
Key Takeaways
- Corporate FDs are deposits offered by companies and NBFCs under RBI regulations.
- These FDs offer higher interest rates than bank FDs but also carry higher credit risk.
- You can receive interest periodically or have it accumulated until maturity through a cumulative option.
- DICGC deposit insurance does not cover corporate FDs.
- Premature withdrawal rules and penalties may apply, depending on the type of corporate FD and applicable regulations.
- Credit ratings, financial health, liquidity terms, and taxation are important factors to consider before investing.
What are Corporate Fixed Deposits?
Companies or NBFCs offer Corporate FDs under RBI regulations. You invest a lump sum for a fixed period, and the issuer agrees to pay interest at a specified rate. At the end of the tenure or maturity, the issuer repays the deposit amount along with interest as per the agreed terms.
You can usually choose how you want to receive the interest. The options include periodic interest payouts or a cumulative option, where interest is added to the deposit and paid at maturity.
Corporate FDs are different from shares because depositing money does not make you an owner of the company. In this case, you are a depositor, and the safety of your money depends significantly on the issuer's ability to meet its repayment obligations.
Also Read About: Company Fixed Deposits
Why Choose Corporate Fixed Deposits?
Corporate FDs can attract investors looking for a fixed-income investment with different interest rates, payout options, and tenures. Here are some benefits:
Higher Interest Rates
Corporate FDs may offer higher interest rates than bank FDs. The exact difference varies by issuer, deposit tenure, and market conditions. Investors should also remember that higher interest rates may come with higher credit risk.
Flexible Interest Payout Options
You can choose how you want to receive the interest based on the options offered by the issuer. Non-cumulative FDs pay interest at regular intervals, monthly, quarterly, half-yearly, or annually. Whereas cumulative FDs add the interest to the deposit and allow it to compound until maturity.
Predictable Interest Income
The interest rate is decided when you invest in the FD and stays fixed for the chosen tenure. This makes it easier to estimate your interest income in advance. Also, unlike shares, daily stock market movements don't affect the agreed interest rate on the deposit.
Different Tenure Options
Corporate FDs are available for different investment periods, depending on the issuer and deposit scheme. This lets you choose a tenure based on when you expect to need the money or your financial goals.
Portfolio Diversification
Corporate FDs can add another fixed-income option to your investment mix. Consider them alongside other investments based on your financial goals and risk appetite. They carry credit risk, so check the issuer's financial strength and credit rating before investing.
Corporate FDs vs Bank FDs: What is the Difference?
The table below shows the core differences between corporate and bank FDs.
| Feature | Corporate FDs | Bank FDs |
| Who issues it? | Companies or eligible NBFCs | Banks |
| Interest rate | Higher, depending on the issuer and tenure | Varies based on the bank, tenure and deposit scheme |
| Main risk | The issuer may face difficulty in repaying the deposit | Deposits may carry bank-related risks |
| Deposit insurance | No deposit coverage under Deposit Insurance and Credit Guarantee Corporation (DICGC) deposit insurance | Deposits are insured under DICGC up to ₹5 lakh per depositor per bank, including principal and interest |
| Credit rating | It is important to check the issuer's credit rating and financial strength | Individual bank FDs are not selected based on a credit rating in the same way |
| Tenure | Depends on the issuer and applicable regulations | Banks can offer different tenures, subject to RBI rules |
| Premature withdrawal | As per RBI regulations, premature repayment for NBFC public deposits is not permitted within the first 3 months. For withdrawals after 3 months up to 6 months, no interest is typically paid. For withdrawals after 6 months until maturity, RBI rules dictate an interest rate reduction of 1% to 2% lower than the rate specified for the actual period the deposit was held, along with applicable penalties. | Allowed as per the bank's terms, though penalties or reduced interest may apply |
| Interest payout | May offer cumulative and periodic payout options | May offer cumulative and periodic payout options |
What Should You Check Before Investing in a Corporate FD?
Before investing in corporate FDs, you should evaluate them based on the following parameters:
Credit Rating
Check the updated credit rating assigned to the FDs by a recognised credit rating agency like CRISIL or ICRA. A higher rating, such as AAA or AA+, suggests the company has a strong ability to repay the amount. But it does not eliminate default risk.
Financial Health of the Issuer
Review the issuer's financial performance, debt levels and track record of meeting its obligations. The RBI does not guarantee an NBFC's financial health or repayment of deposits. This is why it is important to evaluate the issuer before investing.
Deposit Insurance
Corporate FDs are not covered under DICGC deposit insurance. This means the ability to recover your money from a corporate FD depends on the issuer's ability to repay.
Liquidity and Withdrawal Terms
Check the lock-in period and premature withdrawal rules of the FDs. Some corporate FDs may restrict early withdrawal, while premature closure may result in reduced interest. Also, check whether the deposit is callable or non-callable, as this affects whether you can withdraw the money before maturity.
Tax on Interest
Interest earned on a corporate FD is taxable under the applicable income tax rules. Your tax liability depends on your total taxable income and the prevailing tax provisions, so check the latest rules before investing.
Under Section 194A of the Income Tax Act, Tax Deducted at Source (TDS) is applicable on corporate FD interest if it exceeds ₹5,000 in a financial year (whereas for bank FDs, the TDS threshold is ₹40,000, or ₹50,000 for senior citizens). If your total income is below the taxable limit, you can submit Form 15G or 15H to avoid TDS deduction.
Example: How Much can You Earn From a Corporate FD?
Let us say you invest ₹3.50 lakhs in a corporate FD for 3 years. The interest rate is 8% per annum.
| Year | Opening Amount | Interest at 8% | Closing Amount |
| 1 | ₹3,50,000 | ₹28,000 | ₹3,78,000 |
| 2 | ₹3,78,000 | ₹30,240 | ₹4,08,240 |
| 3 | ₹4,08,240 | ₹32,659 | ₹4,40,899 |
So, after 3 years, the estimated maturity amount is about ₹4.41 lakhs. This means you earned approximately ₹90899 in interest.
Note: The above calculation assumes annual compounding. If the corporate FD compounds interest quarterly, which is common for many issuers, the final maturity amount and total interest earned will be slightly higher.
Steps to Invest in a Corporate Fixed Deposit
The application process may vary depending on the company or NBFC and the platform used to invest.
Step 1: Research the Issuer
Compare corporate FDs from different issuers based on credit rating, interest rate, and withdrawal terms.
Step 2: Choose the Deposit Terms
Select the investment amount and tenure based on your financial goals.
Step 3: Complete the Application and KYC
Fill in the application form and provide the documents required by the issuer. This may include PAN, identity and address proof, bank account details and other documents.
Step 4: Transfer Funds
Pay the investment amount using a payment method accepted by the issuer or platform.
Step 5: Receive Confirmation
After the application and payment are processed, you will receive a deposit receipt or confirmation with your investment details.
Who may Consider Investing in Corporate FDs?
Corporate FDs may suit investors whose financial needs and risk appetite match the features and risks of these deposits. They may be considered by:
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Fixed Income Seekers: Corporate FDs may suit investors who want to earn interest at a predetermined rate for a fixed period.
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Long-Term Investors: These deposits may suit investors who can stay invested until maturity and do not need the money immediately.
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Risk-Aware Investors: Corporate FDs may suit investors willing to check the issuer's credit rating and financial position.
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Regular Income Seekers: Corporate FDs may suit investors who want interest at regular intervals or prefer to receive the accumulated amount at maturity.
Also Read About: What Are the Different Types of Fixed Deposits?
Conclusion
Investors seeking fixed interest income and flexible payout options can consider Corporate FDs. A higher interest rate should not be the only reason to invest. Check the issuer's credit rating, financial health, withdrawal terms, and tax implications to decide whether a corporate FD suits your financial needs and risk appetite.
