Bank FDs vs Company Deposits

Taxation

5 Year Bank fixed deposits offer tax benefits under Section 80C of the Income Tax Act, 1961, whereas corporate FDs don't seem to be eligible for claiming deductions under 80C. Corporate fixed deposits would deduct TDS at the rate of 7.5%, if interest income exceeds Rs. 5,000 annually. Banks need to deduct TDS at the rate of 7.5% if the interest income from FD exceeds Rs.40,000.

Interest Rates

Bank fixed deposits offer interest rates that don't suit everyone, variation among interest rates depends upon tenures, age group of customers, and other factors. Interest rates offered by bank fixed deposits are usually lower as compared to corporate fixed deposits. Corporate fixed deposits also offer varying interest rates depending upon the ratings, investment tenure & other factors.e is a downfall in other securities so purchased.

Risks

Bank fixed deposits are known to be protected up to Rs. 5 Lakhs by the Reserve Bank of India (RBI) as per the new DICGC rules presented in Budget 2020, which means customers have insured deposits up to Rs. 5 Lakhs in the bank including all deposits with the banks. Bank Fixed Deposits are administered by certain regulations of the Reserve Bank of India (RBI) hence considered a safer option as compared to Corporate fixed deposits which may involve more risks.

Features of Fixed Deposits

Fixed deposits have been considered a great mode of investment due to some great customer-oriented features which are discussed below.

Tenure

Fixed deposits usually have a tenure range of 7 days to 10 years. Interest rates of fixed deposits also vary in accordance with different tenures and other factors.

One-time investment

Fixed deposits are seen as a single-time investment mode. For any customer who is willing to make extra deposits, there would be a requirement of opening separate deposit accounts.

Rate of Interest

The rate of interest on Fixed Deposits depends upon the investment tenures, market rates & other important factors.

The interest rates offered on FDs are generally lower than on other investment products. But at the same time, they are less riskier than a number of other financial products.

Corporate FDs usually offer higher interest rates than bank FDs as they carry a substantially higher risk than the latter. Investors could however consider choosing high rated corporate FDs over lower-rated ones to avoid the extra risks of defaults associated with them.

Easy planning

Usually, Fixed Deposit offering institutions provide a Fixed Deposit Calculator which helps in planning out investment easily. Fixed Deposit Calculators can be used simply. Anyone who is willing to calculate their investment amount may put the desired investment amount and term and the Fixed Deposit calculator will help in providing maturity amount, payout amount, and interest which is earned. Other factors can also be ascertained by a fixed deposit calculator.

Benefits of fixed deposits

Safe mode of investment

Fixed Deposits are considered to be a safer mode of investment in comparison to other investment modes available. Fixed Deposits provide a greater level of stability.

Returns

Fixed deposits offer guaranteed and stable returns. An investor also can use the advantage of the Fixed Deposit Calculator to calculate returns with the assistance of entering the principal amount, rate of interest, and tenure.

Premature/Partial Withdrawal

Certain institutions offer fixed deposit schemes with premature withdrawal facilities alongside certain terms and conditions. However, investors could be penalized in certain cases of premature withdrawal which depend on terms and conditions that fixed deposits offer.

Loans

Investors are allowed to avail loan against the fixed deposit. Fixed deposits that provide loan availing facilities are known to usually charge a 1-2% lower rate of interest on loans.

Tax Benefits

Not all Fixed Deposits provide taxation benefits. Only those FDs which have a lock-in period of 5 years are eligible to be claimed for a tax write-off under Section 80C of tax Act, 1961 for an amount up to Rs. 1,50,000 by investors.

Risks involved in liquidity

Liquidity levels may rely on different institutions offering their fixed deposit schemes. Tax Saving Fixed Deposits might not allow premature withdrawal, whereas normal fixed deposits offered by banks may offer easy liquidation facilities.

Default Risk

Bank defaults usually don't default and are considered to occur very rarely. But there's always some level of possibility for default to require place. Nevertheless, the quantity of deposit along side interest up to Rs 5 lakh per investor per bank is assured by DICGC just in case of a default. Corporate FDs also carry a default risk which is usually above the danger on bank FDs. Therefore it's important for investors to research completely before investing. there's the likelihood of a situation where corporates aren't ready to return the funds invested for several reasons. A method to understand the risk on a company deposit is to review the rating given by an independent rating agency. However, one must take under consideration that a high rating still doesn't guarantee zero default possibility.

Risks because of inflation

Inflation in simple language is that the increase of products and services over a particular period of your time . If the inflation rates are above the rate of interest offered by the Fixed Deposit, then the actual rate of return (which is that the rate of interest - inflation rate) turns negative. In other words, the deposit could possibly cause erosion of wealth for investors. Hence, there's some level of risk involved because of inflation.

Who should apply?

Eligibility criteria varies depending upon financial institutions offering fixed deposits.

Indian residents, HUFs, companies, family trusts, associations, clubs, societies can apply in fixed deposit schemes.

Since fixed deposits involve low levels of risks, investors who are seeking a safe mode of investment can think about going for fixed deposits for investments. Also, Investors with certain demands regarding the tenure and returns may look at fixed deposit schemes as an option. Since many banks offer higher rates of interest for senior citizens, it becomes a suitable option for senior citizen investors to look into such offers to invest.