Should You Invest In Corporate FDs With Returns Up To 9%?

Some financial advisors are suggesting corporate FDs as a way to gain marginally better yields, as bank fixed deposits (FD) rates settle around the 4-6 per cent mark. But there are a lot of risks involved owing to the uncertainty of the economy, credit ratings and capital structure of corporates when it comes to invest in a Corporate FD. Considering the same only a few names are suggested by advisors in this sector. So let's look at the benefits of investing in this investment vehicle i.e. Corporate FD or Company FD.

Company FDs are ideal for someone, particularly senior citizens as they want regular income benefit after their retirement. Corporate FDs usually bid marginally better returns than FDs of banks. We are extremely specific and prefer the Hawkins Cooker FD Scheme as an instance here as it provides a higher interest rate among its counterparts. In the range of 5.6% to 9%, the top-rated corporate FDs provide higher interest, which is significantly better than the 4-6% provided by major banks across different tenures.

Currently, Hawkins Cooker FD (MAA rated by ICRA) is providing a 9 per cent interest rate for a tenure of 12 to 36 months, followed by Shriram City Union Finance and Shriram Transport Finance which are offering 8.9% interest rate for 12 to 60 months of tenure and both are MAA+ rated by ICRA. For corporate FDs, the guidelines for premature withdrawal are much stricter than bank FDs. In the first three months of making the deposits, you can not withdraw them. After that, multiple corporations levy varying penalties.

Withdrawal is marginally better in the case of bank FDs. The returns on corporate FDs, at your current tax slab rate is subject to taxation. From FY 2020-21, if the interest crosses Rs 5,000 for Indian residents, a company will also subtract TDS on the interest. TDS @10 per cent will be deducted from the interest amount if you have PAN specifics. In case PAN is not provided, a 20% TDS will be withheld. For those who claim that their overall income will not exceed the taxable cap, Form 15G or 15H can be submitted to the corporation.

If the amount exceeds the preset cap, TDS is withheld on the received interest on bank FDs. Before paying to the payee, the payer is required to subtract the due tax. According to the Income Tax Act of 1961, if they fall into the taxable category, TDS is deducted from the interest received on the fixed deposit. TDS on interest received on fixed deposits is valid only if the interest earned exceeds Rs 10,000.

Coming again to the higher returns compared to bank FDs, we discussed above that Hawkins Cooker FD scheme is providing fixed deposits to the investors for tenure up to 36 months with an interest rate up to 9% per annum. This scheme offers an interest rate of 8.5 per cent for 12 months, while the applicable interest rates are 8.75 per cent and 9 per cent for 24 months and 36 months, respectively. As the scheme bears MAA (stable) rating from ICRA, this implies that there are high credit standards and low chances of default. On July 27, 2020, this grade was issued. Since then, it is possible that the financial status of the company could have modified.

Our take

Owing to the uncertainties involved, some investors remain cautious of corporate FDs. The difference is not wide enough between corporate and bank FD rates to persuade them to embark on the higher risk. Corporate FDs provide higher returns true, but they are still riskier than bank FDs. To lower your risk in this place, adhere to AAA-rated corporate FDs only.