Investing in Corporate Fixed Deposits? Know the Benefits and Risks

Corporate FDs generally offer 0.5% to 3% higher interest rate than Bank FDs for similar maturities. Some Corporate FDs offer interest rates as high as 7-8%. Once you have locked in the deposit at specific rate, you will continue to receive that rate till maturity. In addition, you can avail of a loan against your corporate fixed deposit of up to 75% of the deposit amount.

All individuals, non-resident Indians (NRI), and senior citizens above the age of 18 are eligible to invest in Corporate FD. Corporate FDs usually offer 25-30 basis points higher interest rate than the prevailing rate to senior citizens (those above the age of 60). Minors can also open an account through a guardian. You can place deposits offline or online by submitting the required form and KYC details.

State bank of India, India's largest public sector bank currently provides interest rate of 5.3% per annum for fixed deposit of 3 year to 5 year tenure. Meanwhile, Bajaj Finance, one of the leading NBFCs in India currently provides an interest rate of 6.5% per annum for similar tenure.

Are corporate fixed deposits safe?

All NBFCs/companies that want to collect deposits have to adhere to stringent regulations and guidelines laid down by the RBI and Ministry of Corporate Affairs (MCA). Consequently, only a few are eligible to accept deposits from retail investors.

Ratings agencies such as CRISIL, CARE, and ICRA assign ratings to corporate FDs. Deposits rated AAA (highest rating) is considered to safer compared to those with AA, A, or BBB rating. It is important to note that only companies with a minimum of BBB rating (above investment grade) can accept deposits. Although such measures help lower the risk, this does not mean they are "risk-free".

Corporate FD can be prone to default risk if the financial condition of the company deteriorates. In such a situation, it can become difficult for the company to payout interests or in the worst case, even the principal amount.

At times credit rating agencies may not be agile enough to detect deterioration in a company's financial health. Therefore, the rating may not always be reliable. A case in point is Dewan Housing Finance Ltd. (DHFL) fixed deposit. The crisis in the company around two years ago caused the downgrade of its FD from 'A' to 'BBB-' and subsequently to 'D'. It stopped accepting new deposits, renewal of existing deposits, and also stopped premature withdrawals. Later, the company went on to face bankruptcy proceedings. The depositors are still waiting to recover the deposit money from the company.

A few other companies have also defaulted on interest payments in the past. And amid the pandemic situation, the financial stress on certain companies is likely to have intensified. Therefore, it is important to pick Corporate FD carefully. Opt for only those rated 'AAA' to minimise the risk of default.

As you may be aware, the Deposit Insurance and Credit Guarantee Corporation, a subsidiary of RBI, insures deposits of up to Rs 5 lakh with banks. This ensures that even if a bank faces liquidation, the investors' deposits remain secured. However, this facility is not available to depositors in Corporate FDs.

Furthermore, the interest earned on corporate fixed deposit is taxable as per your income tax slab. If you fall in the highest tax bracket, the post-tax return may not only be less attractive, but may also fail to beat the inflation. Such investors can consider investing other tax-efficient avenues such as debt mutual funds.

So while the higher interest rates on Corporate FD can lure you to invest in them, it is important to understand the afore-mentioned risk before taking any investment decision. It can also prove to be beneficial if you diversify your investment in Corporate FD across multiple companies.

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Frequently Asked Questions (FAQs)

What is the difference between a Bank FD and a Corporate FD?

Bank Fixed deposit is an investment option offered by banks wherein you can park your money for various tenures ranging from 7 days to 10 years. Corporate fixed deposit is a fixed deposit offered by various companies and non-banking finance companies (NBFCs). The maturity range of Corporate FD can range from 1 year to 5 years.

How is a Corporate FD taxed?

The interest that you earn on Corporate FD is taxable as per your income tax slab if the income exceeds Rs 5,000 in a financial year. The company will deduct TDS at the rate of 10% on the interest earned for resident Indians and 30% plus the applicable surcharge and cess for NRIs. If you are a resident Indian and your total taxable income is Nil, you can claim the TDS waiver by submitting Form 15G or 15H (for senior citizens).

Will premature withdrawal of Corporate FD attract penalty?

Companies do not permit pre-mature withdrawal within the first three months of the opening of account. If you want to withdraw after three months, the company will pay a lower interest than the applicable deposit rate.

What is the minimum amount that you can deposit in a Corporate FD?

The minimum deposit amount varies from company to company. It is usually Rs 20,000 to Rs 25,000. However, it can be lower for some companies.

When will I receive the interest amount on my Corporate FD?

Corporate Fixed Deposit offer cumulative and non-cumulative interest payout options. If you opt for cumulative payout, the interest will be payable at the time of maturity of deposit along with the principal amount. The interest rate is compounded annually.

In case of non-cumulative payout, the interest will be paid monthly, quarterly, half-yearly, or yearly basis depending on your preference.

Warm Regards,
Divya Grover
Research Analyst

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