Fixed Deposits are one of India's favorite investments, and most investors mark it as one of the safest and best investments, but why is there a line between bank FD's and Corporate FD's? What are the differences that make the investors think before choosing any particular type of fixed deposit?
- Rate of Interest
One of the biggest factors before choosing any type of investment is how much returns the investor will make; this factor also resides with fixed deposits in the form of Rate of Interest. Banks offer an average rate of interest contrary to corporate fixed deposits. If one has invested in corporate fixed deposits over banks, they can expect a higher and guaranteed interest rate over the tenure. Another reason one should invest in corporate fixed deposits is that most of them offer both cumulative and non-cumulative interest-based payouts. In cumulative interest payout, the interest is reinvested, leading to a better payout, compounding returns.
- Tenure Period
Fixed Deposits are a long-term investment, and most of the investors in their older age invest in this type of investment for a peaceful retirement. In such a case, the tenure period acts as an important factor to know how long before the maturity the investor is getting the returns. In the corporate fixed deposit, the tenure period is to the most six months to 5 years, while the tenure period in bank fixed deposit is from months to years and much longer than what corporate fixed deposit offers. If one wants to invest for a longer period in fixed deposits, bank fixed deposits are the best option over a corporate fixed deposit.
- Risk Investment
Before investing, a wise decision is to analyze the risk and how much risk can be afforded. Fixed deposits are safe investments, but they do involve risks though in the longer run. Corporate fixed deposits are unsecured, and there is always a doubt of the company collapsing. Meaning, corporate fixed deposits are risky, but one of the benefits is market changes do not influence them. On the contrary, bank fixed deposits are secured investments and low in risk. Besides, RBI covers security up to 1 Lakh rupees on fixed deposits on each. In certain cases, the numbers are up to 5 Lakhs.
- Premature Withdrawal Penalty
In most instances, when there is an emergency or need for funds, people think of withdrawing fixed deposits. The problem with premature withdrawal is banks and corporates both penalize for withdrawing before the tenure is completed. If both the financial institutions penalize for premature withdrawal, then which should be a better option? It is the bank fixed deposit. The reason for this is bank charges around 1-2% on the interest for premature withdrawing. The case with corporates is totally different. First, not all corporates offer premature withdrawal before the three months to six months from the investment date. If there is a premature withdrawal from corporates that offer, then no interest accrues on the deposit. Withdrawing after six to twelve months, certain companies charge a penalty of 2-3 percent.
- Taxation
Do fixed deposits incur taxes? Yes, they do, but there are certain tax benefits that one must know before investing in fixed deposits. Which is the best Fixed Deposit for tax saving? Is it bank FDs or corporate FDs? It is the bank fixed deposit because many banks with a lock-in period can save in taxes. If the lock-in period is for five to ten years, there is a tax benefit under 80C of the income tax act. However, there are a few conditions. If the fixed deposit is withdrawn before the lock-in period or the interest rate is beyond Rs. 10,000, then the bank cuts the tax directly from the source.
These are the major differences between bank fixed deposits and corporate fixed deposits. There are good tax benefits on bank FDs, while corporate FDs are a great choice for a higher interest rate and cumulative-based interest. If money is not stable in your pocket and the expenses are more, don't go for the corporate FDs as they have a higher penalty for premature withdrawals. Tenure wise, Bank Fixed Deposits are great as they offer a longer tenure, and when the tenure is long, one can expect interests for a long time which is not true with corporate fixed deposits as they are only available up to 5 years and no longer than it. Overall, both are the best investments in Fixed Deposits but choosing the right fixed deposit is based on the investor's goal.
