Bank FD vs Corporate FD: Which investment option offers better returns?

Fixed Deposits (FDs) are one of the most preferred investment options in India due to their simplicity, guaranteed returns, and low risk. However, FDs are offered by both banks and corporates, and understanding the differences between the two is crucial for making an informed decision.

Introduction

Fixed deposits are time-bound financial instruments where an individual deposits a sum of money with a financial institution for a specific tenure at a pre-determined interest rate. Both banks and corporations offer FDs, but they come with different levels of risk, return, and security. Before investing, it’s important to weigh the pros and cons of each type of FD.

What are bank FDs?

Bank FDs are financial instruments offered by commercial and cooperative banks. The depositor invests a lump sum for a fixed period, earning a guaranteed rate of interest. Bank FDs are considered one of the safest investment options because they are regulated by the RBI and come with deposit insurance coverage of up to ₹5 lakh under the Deposit Insurance and Credit Guarantee Corporation (DICGC).

Example of bank FDs: A depositor invests ₹1,00,000 in an FD with State Bank of India (SBI) for 1 year at an interest rate of 6.5%. At maturity, the depositor receives the principal plus interest of ₹6,500.

What are corporate FDs?

Corporate FDs are fixed deposits offered by Non-Banking Financial Companies (NBFCs) or corporations to raise capital. These FDs generally offer higher interest rates compared to bank FDs, but they carry higher risks. The safety and reliability of a corporate FD depend on the credit rating assigned by agencies such as CRISIL, ICRA, or CARE.

Example of corporate FDs: Bajaj Finance offers an FD with an interest rate of 9% for a tenure of 1 year. For a deposit of ₹1,00,000, the investor would earn ₹9,000 as interest.

Key differences between bank FDs and corporate FDs

Benefits of bank FDs

Safety and security: Bank FDs are among the safest investment options, regulated by the Reserve Bank of India (RBI). Moreover, deposits up to ₹5 lakh per bank (principal and interest combined) are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC), reducing the risk of loss in case of bank failure.

Stable returns: Bank FDs provide a fixed interest rate for the chosen tenure, ensuring predictable returns, making them suitable for conservative investors.

Flexible tenures: Banks offer a range of tenure options, from as short as 7 days to as long as 10 years, allowing investors to align investments with their financial goals.

Risks involved in bank FDs

Reinvestment risk: If interest rates fall, investors might earn lower returns when reinvesting after the FD matures.

Inflation risk: Fixed returns might not keep up with inflation, eroding the purchasing power of your money over time.

Benefits of corporate FDs

Higher interest rates: Corporate FDs typically offer higher interest rates (ranging from 7% to 10% or more) compared to bank FDs, making them appealing to investors seeking higher returns.

Potential for higher growth: With reinvestment options, corporate FDs can provide better compounding benefits, significantly boosting returns over time.

Customised features: Many corporate FDs offer additional benefits, such as loyalty bonuses, higher rates for online deposits, or extra interest for senior citizens.

Risks involved in corporate FDs

Credit risk: The biggest risk with corporate FDs is the potential for default by the issuing company. Companies with lower credit ratings are more likely to default on interest or principal payments.

Lack of insurance: Unlike bank FDs, corporate FDs are not insured, making them inherently riskier.

Liquidity constraints: Premature withdrawal from corporate FDs is often restricted or subject to high penalties, limiting access to funds in emergencies.

Taxation

Bank FDs: Interest income from bank FDs is subject to Tax Deducted at Source (TDS) at 10% if it exceeds ₹40,000 in a financial year ( ₹50,000 for senior citizens). However, investors can submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) to avoid TDS if their total income is below the taxable limit.

Corporate FDs: Interest earned from corporate FDs is also subject to TDS at 10% if it exceeds ₹5,000 in a financial year. Unlike bank FDs, corporate FDs do not provide the option to submit Form 15G or 15H, so TDS is deducted regardless of the investor’s income level, which can impact liquidity for those in lower tax brackets.

Conclusion

Choosing between a bank FD and a corporate FD depends on your financial goals, risk tolerance, and investment horizon. Bank FDs provide unmatched security and liquidity, making them ideal for conservative investors. Corporate FDs offer higher returns but require careful evaluation of the issuer’s financial health and credit ratings.

Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited