Fixed Deposits (FDs) are low-risk investments with several advantageous features, including assured returns, flexible tenor, and loans facility against an FD. Banks and non-banking financial companies (NBFCs) can offer different types of FDs. Investors choose the best FDs with banks and enjoy a balanced investment portfolio. Fixed deposits are very similar but different in risk and returns.
Bank Fixed Deposits
When you consider including fixed deposits in your investment portfolio, the first name that may come to your mind is bank FD. Cooperative, commercial, or small banks all offer FDs to individuals.
Commercial banks can determine their deposit interest rate for different amounts and maturities of deposits. Banks can formulate their special schemes for deposits. They can offer interest rates above a cut-off specified by the Reserve Bank of India (RBI).
The FD interest rate with most commercial banks is 4-6%. A few renowned banks can offer you an interest rate of 6.65%. Small banks may not provide high credit FDs like major names in the banking sector. Many banks offer NRI FDs with Non-Resident Ordinary (NRO)/Non-Resident (External) (NRE) accounts.
Company Fixed Deposits
A fixed deposit with an NBFC is called Company/Corporate deposit. These company FDs are regulated under Section 58A, Companies Act, India. NBFCs are not impacted by the modifications in the RBI’s monetary policy. Individuals can open an FD for a maximum tenure of 60 months. The starting investing amount with a company FD can be Rs.25,000. These FDs can provide a higher interest amount than bank FDs. Depositors need to check the credit ratings for these FDs.
Differences between Bank FDs and Company FDs
Following are the primary differences between Bank FDs and Company FDs:
Individuals can start bank FDs with as low as Rs.100. You can extend it to a high limit in the multiples of a hundred. These are easy investments for any individual. On the other hand, company FDs may start with Rs.25,000.
Bank FD tenures are highly flexible. It ranges from 7 days to 20 years. You can pick the right tenure to meet your financial goals, whether it is a long-term goal or a short-term goal. On the other hand, company FDs are available for a tenure of 12-60 months.
Bank fixed deposits are considered safer than corporate fixed deposits. Most bank FDs are backed by Insurance Act, but company FDs are not backed. Your invested capital in a bank FD is insured under the Deposit Insurance and Credit Guarantee Corporation of up to Rs 1 Lakh. Company FDs are regulated by the Companies Act under section 58A and considered risky. Generally, there are no cases of bank defaults because of the strict RBI guidelines concerning cash reserve ratio and other requirements for the bank.
Bank FD interest rates are compounded quarterly. Interest rates on bank FDs are mainly based on the RBI (Reserve Bank of India) base rates. On the other hand, interest rates offered on company FDs vastly depend on the credit rating. One can use an FD return calculator to calculate your interest income on an amount.
Credit agencies, like CRISIL, CARE and ICRA, rate the company FDs generally. Investors can check the credit rating of the FD before investing. Credit rating is compulsory for NBFCs to be eligible to issue fixed deposits. Bank deposits do not require ratings by agencies. Investors trust bank FDs more than company FDs.
FD interest is fully taxable depending on the depositor’s tax slab. It will be added to the depositor’s total income. Also, under section 194A, Income Tax Act, 1961, you need to pay TDS @10% if your total interest earned is more than Rs. 40,000 in a year (Rs.50,000 for senior citizens under Section 80 TTB). Company deposits attract TDS if the interest earned exceeds Rs 5000 in a financial year. You can calculate your returns using an FD return calculator and plan your investments accordingly to save on taxes.
Individuals can decide on fixed deposits considering the risk and return. Individuals look at company FDs when bank FD interest rates fall. While choosing company fixed deposits to earn higher returns, individuals should be careful as there are chances of a delayed payment of interest and default. Look for track record and credit rating, and other aspects regarding the safety of funds and convenience of investing.
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