Corporate fixed deposits are offered by public or private sector companies, which may or may not be a financial institution. Hence, these are also known as company FDs. Corporate FDs are not only offered by lending institutions but also by different public sector housing and transport departments.
On the other hand, standard fixed deposits are only provided by commercial and cooperative financial institutions.
Corporate FD rates are comparatively higher than those offered by commercial and cooperative lenders. Hence, these provide more lucrative investment opportunities, especially to senior citizens.
Few of features you must know about corporate FDs are mentioned below –
Regulations governing FDs
Corporate fixed deposits are provided under Section 58A of the Companies Act, 1956. As per this Act, the company will offer more priority to its shareholders rather than its fixed deposit customers when facing bankruptcy or insolvency.
However, several NBFCs offer FDs that are backed with ratings from top credit companies to assure customers of their safety and security. For example, Bajaj Finance Fixed Deposit bear FAAA rating from CRISIL and MAAA rating from ICRA.
Corporate fixed deposits provide no interest if the invested amount is withdrawn before a specific period, which usually ranges between 3 to 6 months.
Withdrawing the amount before the fixed deposit maturity period can attract a penalty fee ranging between 0.5% and 1%.
Rate of interest
Corporate FD rates can be more than 2% higher than standard fixed deposits. Senior citizens are also eligible to receive 0.35% more interest than other customers. Hence, company FDs are one of the ways to make money after retirement.
Corporate fixed deposits provide no interest if the invested amount is withdrawn before a specific period, which ranges between 3 to 6 months.
Withdrawing the amount before the fixed deposit matures can attract a penalty fee ranging between 0.5% and 1%.
Corporate FDs usually have shorter lock-in periods compared to conventional fixed deposits. Usually, tenors of these FD stretch up to 5 years. Longer lock-in periods will offer higher corporate FD rates.
However, investors can opt for auto-renewal and reinvest the return for the original period without submitting any paperwork.
Income tax deduction
Commercial and cooperative financial institutions will deduct TDS on fixed deposits if the interest earned is more than Rs.40,000 in a financial year (as per Budget 2019).
In case of corporate fixed deposits, interest of more than Rs.5,000 will attract TDS at 10% only if the account holder’s income falls under a taxable slab. Investors not earning taxable income can file Form 15G (Form 15H for senior citizens) to avoid TDS.
Investing in a 5-year tax-saver fixed deposit will enable investors to save on income tax under Section 80C.
Interest payment frequency
Investors can opt for a non-cumulative fixed deposit, which offers interest pay-out monthly, quarterly, half-yearly, or yearly. These types of FDs are beneficial for investors seeking regular income; for example, senior citizens.
On the other hand, cumulative FDs offer returns only after maturity. Usually, the corporate FD rates are slightly higher with cumulative FDs in comparison with non-cumulative ones.
Loans against fixed deposit
Similar to standard FDs, corporate fixed deposits also offer loans against the invested amount. Generally, companies offer a discounted sum of the invested sum, which can be 75% in the case of cumulative FD and 60% for non-cumulative FDs.
Companies offer repayments tenors ranging from 90 days up to the maturity of the FD with such financial products. Borrowers also don’t have to pay any extra charges when foreclosing or part-prepaying the loan.
All fixed deposits offered by commercial and cooperative financial institutions are insured up to Rs.1 lakh by the DGIC. However, corporate fixed deposits are not insured by any agencies. Hence, it is recommended to opt for a company that has goodwill and significant market performance.
Corporate fixed deposits are one of the ideal short-term investment options. Investors can use an FD return calculator to evaluate their earnings before investing and create their budget accordingly.
Gaurav Khanna is an experienced financial advisor, digital marketer, and writer who is well known for his ability to predict market trends. Check out his blog at HighlightStory