Corporate FDs are offered by some companies when there is a need for cash. Those whose interest rates are more than 10% are also seen. Experts have a very different opinion on this. Investing in these FDs needs to be done very carefully.
The interest rates offered by major banks on fixed deposits have come down in the last few months, reducing the importance of fixed deposits among the highest tax slabs and senior citizens. In such a situation, financial planners are advising people to invest in corporate fixed deposits. Which is giving twice more interest than the country’s largest bank State Bank of India. Let us also tell you what is a corporate fixed deposit, what are its benefits and what are the risks involved in investing in it.
What are Corporate Fixed Deposits?
Corporate fixed deposits are offered by companies. When companies need to raise cash in a hurry, they take out fixed deposits offers at attractive interest rates. Certificates of Deposit of different tenures are issued to the investors at fixed interest rates.
Double the interest rates of SBI
High rated companies offer different interest rates on corporate fixed deposits of 1-5 years. Interest rates can range from 8 percent to 10.75 percent depending on the tenure. Companies with lower ratings tend to offer higher interest rates than those with higher ratings for default risk. On the other hand, if we talk about SBI, the country’s largest bank, offers 5.40 percent interest rate on simple fixed deposits for a period of 5 years.
What Experts Advice
However, due to the financial stress created by the pandemic, the emphasis has been on corporate balance sheets, which is why analysts advise one to be selective while investing in corporate FDs. Analysts recommend investing only in AAA-rated corporate FDs to better protect your capital. Currently, AAA-rated corporate FDs offer interest ranging between 6 to 8 per cent, depending on the tenure of the investment.
No Guarantee While
investing in corporate FDs, it should be remembered that unlike bank FDs, they are not safe. This means that these FDs neither guarantee any capital security nor pay interest. This means that if a company faces a financial crisis, then investors can lose their money.
TDS is deducted In
case of corporate FDs, investors are taxed as per the income tax slab under which they fall. Therefore, people in the highest tax bracket will pay more tax. As per the Income Tax Act, 1961, if the interest exceeds the limit of Rs 5,000 per annum, then the interest earned from the deposits of the company will be deducted at source as tax (TDS). However, you can save on TDS by submitting Form 15G (or Form 15H for senior citizens) to a bank or NBFC.
Penalty on Premature Withdrawal
It is to be remembered that some corporate fixed deposits do not allow premature withdrawal for a period of three-six months and if premature withdrawal is made, no interest on the deposit Seems like. On premature withdrawals after six to twelve months, some companies take a cut of around 2 to 3 per cent on the interest rate offered.
Lockin Period
Most company FDs come with a lock-in period of three months till an investor can withdraw the amount. Pre-maturity withdrawal means closing the entire FD even after the lock-in period is over. An investor will have to forgo some interest in case of making a withdrawal before the FD maturity.
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