Fixed deposits are one of the favorite financial instruments of most of the individuals as fixed deposits will give them steady returns with very less risk involved.
Here are 3 major differences between a bank deposit and company fixed deposits or corporate fixed deposit.
Corporate fixed deposits are riskier than bank fixed deposits and it is not backed by any Insurance Act. These deposits are governed by the Companies Act under Section 58A. In fact, these deposits are not secured and there maybe no charge against even the assets of the company. This is why they are extremely risky.
Your money in a bank fixed deposit is guaranteed by the Deposit Insurance and Credit Guarantee Corporation up to an amount of Rs 1 Lakh in the bank. Generally, you do not hear of bank defaults because of the stringent Reserve Bank of India guidelines with respect to CRR and other requirements.
Interest rates offered by corporate fixed deposits are generally higher than those offered by banks. Interest rates vastly depend on the credit rating, which means lower the credit rating higher will be the interest offered.
Interest rates on a bank FD, are almost always compounded quarterly. Interest rates are mostly based on the Reserve Bank of India base rates.
The deposit will attract Tax deducted at Source depending on individuals tax slabs if the interest income earned is more than Rs 5000.
Tax is deducted at source when the interest income exceeds Rs of INR 10,000 in a financial year. One can avoid TDS, by submitting it form 15G or form 15H.
Company deposits or corporate deposits are generally rated by rating agencies like CRISIL, CARE and ICRA. This is to allow comfort for investors, who could invest when the credit rating is the highest.
Also credit rating is compulsory for companies in order to be eligible to raise money via fixed deposits. Bank deposits are not rated.
Individuals can decide on the product considering the risk and return they are looking for. For Company fixed deposits, one should be careful when choosing as there are higher chances of default in timely payment of interest and the principle amount.
Individuals who are looking for higher returns can consider investing in company fixed deposits when bank fixed deposits are falling. However, do look for credit rating, track record, ECS option and other things that could offer convenience and safety.