Corporate Fixed Deposits: Benefits, Eligibility, and More
Most Indians are known to traditionally favour conservative investment options. The love for gold among Indian investors underlines this. Fixed Deposits (FDs) are another investment option that is popular among Indians. You can invest in fixed deposits for stable and guaranteed returns. The low risk associated with FDs makes them the preferred investment option for risk-averse investors.
In FDs, banks are the traditional choice because of the trust they command. But you can also opt for Non-Banking Financial Companies and other financial institutions for Fixed Deposits. Such options are called Corporate Fixed Deposits (Corporate FDs). Investing in these could give you superior benefits compared to regular FDs. This article will provide you with a clear picture of:
- Benefits of investing in corporate Fixed Deposits
- How are corporate FDs different from regular FDs?
- Whether corporate FDs the right investment option for you?
What is a Corporate Fixed Deposit?
As the name suggests, a Corporate Fixed Deposit is an FD scheme offered by corporates. RBI has licensed select Non-Banking Financial Companies (NBFCs) to take deposits from the general public.
Just like regular FDs, Corporate FDs are also conservative investment options. The company may use your fund for its expansion activities or for lending to its borrowers, but the interest rate is fixed and not dependent on how the company performs in the stock market.
Opting for a corporate FD comes with certain risks as you could lose your money, including the interest earned, in case the company defaults. Hence, the risks associated with Corporate FDs are higher when compared to regular bank FDs. Therefore, it becomes imperative to research well about the company before investing.
Also Read: Experience financial growth with unmatched Bajaj Finance FD Rates
Features of Corporate FD
Fixed Interest Rates
Corporate FDs ensure a fixed income. Corporate FD rates rarely change and do not depend on market conditions. This feature is an important reason why many investors in India prefer Fixed Deposits.
One of the biggest disadvantages of investing in an FD is the lock-in period. But Corporate FDs could be a solution here. Many Corporate FD providers allow premature withdrawal with fewer conditions.
Because premature withdrawal is easier in corporate FDs, they have comparatively higher liquidity. But their liquidity may still be lower than other options that don’t have a lock-in period.
Rated by Credit Rating Agencies
NBFCs are rated by credit rating agencies, which makes it easier for you to choose according to your investment goals and risk appetite. Usually, Corporate FDs with comparatively lower credit ratings carry higher risk, but they have higher return potential.
Loans on FD
Corporate FDs may give you loans of up to 75% of total FD value.. The FDs can also be used as collateral for loans in some cases.
Benefits of Investing in Corporate FDs
Below are some of the benefits of Corporate FDs that make them an attractive investment option:
Flexibility of Tenure
Corporate FDs are similar to regular FDs, but when it comes to tenure they offer more flexibility. Banks typically have set tenures for fixed deposit schemes, but many corporate FDs allow for customisation. You can choose your tenure based on your financial goals and interest rates. Premature withdrawal terms are also slightly relaxed for corporate FDs.
One of the most significant advantages of investing in an FD is the assured returns. Your investment is not linked to the market, and the returns are based purely on the interest rate offered. Corporate FDs carry the same benefits as bank FDs. These come under the strict purview of the RBI; hence, the chances of a corporate changing the FD interest rate after signing up are very low. This gives you the benefit of fixed returns that facilitate better investment planning.
Higher Interest Rates
Regular FDs have a lower return compared to market-linked investment options, even though they make it up with fixed interest rates and zero risks. But you may feel dissatisfied occasionally, especially when it fails to beat inflation. Corporate Deposits are good solutions as they offer comparatively higher interest rates. There are two reasons why Corporate Fixed Deposits give you higher returns: to attract more customers from traditional institutions like banks, and because their loans usually have higher interest rates. However, Corporate FDs are not secured under the insurance cover offered by the Deposit Insurance and Credit Guarantee Corporation (DICGC), an RBI subsidiary.
But, as with every other investment option, the higher return potential could mean higher risk. This is because NBFCs and other financial institutions may not have fundamentals as strong as banks. But, even then, the risk associated with investing in corporate FDs still remains low.
Eligibility Criteria for Corporate FD
Investing in a Corporate FD online or offline is easy. To get started, check out the eligibility criteria. Below is the list of eligible individuals/entities that can apply for a Corporate FD:
1) All individuals with the requisite identity and address proofs.
2) Members of Hindu Undivided Families (HUF).
3) Clubs that have registration and PAN details.
5) Associations and societies that have proper registration documents.
6) Registered educational institutions
Further, to open a corporate FD account, you will need documents such as a Ration Card, Voter ID Card, PAN Card, Aadhaar Card, Passport, and Driving Licence. Apart from these, you may also have to submit a couple of passport-sized photos.
Who Should Invest in Corporate FDs?
Corporate FDs are good options for both short and long-term goals. Compounding ensures capital appreciation, especially in long-term investments. However, Corporate FDs could also significantly work well in the short term if you are saving money for a particular goal.
RBI Guidelines that NBFCs Must Follow for Fixed Deposits
We trust banks with our money. But when select NBFCs offer investment options such as FDs, there has to be utmost transparency to gain investors’ trust. NBFCs must follow certain guidelines before launching a fixed deposit scheme. This includes:
- Offer a minimum tenure of one year, and a maximum tenure of five years.
- Adhere to the rates of interest for fixed deposits prescribed by the RBI.
- Stick to the permissible limit up to which they can collect FDs. This limit varies for different NBFCs.
If you want to invest your hard-earned money in a low risk fixed-income investment instrument, Corporate FDs might be a great investment choice for you.
What are the tax implications on Corporate Fixed Deposits?
The returns from Corporate FDs are added to your income and taxed according to the tax bracket your income falls in. For instance, if your income is Rs. 5 lakh and you get Rs. 1 lakh returns from an FD, your total taxable income becomes Rs. 6 lakh. Senior citizens however do get a tax deduction of up to Rs. 50,000 on the interest earned on the FD.
What are the documents required for Corporate FD?
You need a valid government-approved identity and address proof such as an Aadhaar card, Passport or Voter ID to apply for a Corporate FD.
When can you apply for premature Corporate FD withdrawal?
You can apply for premature Corporate FD withdrawal any time after your investment. But penalty charges may apply if you close too soon to the booking date. However, if the FD is prematurely closed, before completing 7 days from the date of the booking, the bank or the company is not liable to pay any interest.
What are the things to keep in mind when choosing a Company fixed deposit?
It is vital to look at the credit rating of the company offering the FD before choosing one. A better credit rating may indicate lesser risk.
What are the different interest payment options of Company FDs?
There are two interest payment options: cumulative and non-cumulative. If you choose the former option, your returns will be reinvested and paid to you only at the time of maturity. In the case of the non-cumulative option, the interest will be paid to you at regular intervals.