Public and Private Sector Companies in India issue Corporate Fixed Deposits. These work just like bank FDs. Companies offer interest on these deposits and they have a maturity period. NBFCs and manufacturing firms are known to issue corporate FDs or company deposits which are basically unsecured loans. There’s no guarantee in case of a default. To cover this risk, corporate fixed deposits offer higher interest than traditional FDs. People especially senior citizens rush to avail corporate FDs.
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Corporate FDs offer 50-100 bps higher rates than bank FDs. Senior citizens earn an additional 25-40 bps above normal rates.
See Also: What is a Corporate Fixed Deposit?
Bank FDs are very safe compared to corporate FDs. The bank fixed deposits are backed by the Government and are governed under strict RBI regulations. However, technically a bank could fail and deposits are insured only up to 1 Lakh per bank under the Deposit Insurance and Credit Guarantee Corporation of India. But, no bank has collapsed since Independence.
Sadly, this cannot be said of Corporate FDs. The returns may be higher compared to bank FDs, but there’s a risk of default. You could lose the interest as well as the principal deposited if a company defaults.
Invest only in AAA-rated Company Deposits. The high credit rating is given after taking into account business risk, management quality, financial risks and the ability to service debt. Ratings are assigned by credit rating agencies like CARE, ICRA, Crisil, and Brickwork.
What if the credit rating falls after investing? Well, get out of the corporate FD even if you incur a premature withdrawal penalty. Don’t invest just by looking at the name of the Company. Some big companies have gone bust in recent times. Do your due diligence and check Company Fundamentals before investing.
See Also: Why Invest in Corporate Fixed Deposits?
Interest earned on Corporate FDs are taxed depending on the income tax slab you fall under. If you are in the highest tax bracket, you end up paying more tax. Tax is deducted at source and for corporate FDs, the limit is Rs 5,000. Save on TDS if you are eligible by filling Form 15G or Form 15H in the case of senior citizens.
A bank fixed deposit is much safer than a corporate FD. If a bank faces a problem, the RBI intervenes to protect the bank. RBI facilitates a merger with stronger banks to safeguard you and other depositors.
Conservative investors must stay far from corporate fixed deposits. It's best for them to stick to bank FDs. There are chances that the corporate may collapse and you lose principal and interest. When you invest in corporate FDs you are concentrating funds in a specific company. Conservative investors must stay far from Corporate FDs.
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