Fixed deposits (FDs) of companies that earn a fixed rate of return over a period of time are called Company Fixed Deposits. Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits.
The tenure can vary from a minimum period of 15 days to five years and above, but short tenured FDs continue to be the best bet. Even if a 3-year-long FD looks lucrative, it’s advisable to pick a short-tenured one. In a falling interest rate regime (like the current one), it is advisable to invest in longer tenure FDs with higher interest rate.
These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option. Therefore, always pay heed to the rating before putting money into any such FD.
Senior citizens, shareholders and employees are generally entitled to a higher rate of return (say, 0.5%) than other general category retail investors.
Company FDs offer the tax saver deposit, which qualifies as an eligible investment up to rupees one lakh (consolidated with other tax saving instruments), under section 80C of the Income Tax Act, for income tax deduction, with a lock in period of five years. TDS is deductible over and above Rs 5000.
The rate of interest on company FDs is normally higher than the rates offered by banks. This could be attributed to the element of risk involved while investing in a corporate FD as against a bank. As banks are subject to control of the Reserve Bank of India, bank deposits are fairly safer instruments.
Deposits thus mobilised are governed by the Companies Act under Section 58A.
This facility preempts the need to remember the maturity dates of various deposits. The deposit is automatically renewed on maturity as per the depositor’s instructions. The risk of losing further interest on a matured deposit is thus removed.
Find out how the FD fares on the pre-mature encashment front, i.e., how easily would the investment be liquidated. Also enquire about the penalty clauses, e.g. is there a loss of interest and/or in principal amount.
Fixed deposits from reputed entities offer additional benefits, e.g., they can be used as collateral for raising loans, premature withdrawal and cumulative accrual of interest is also allowed.
- Tenure:
The tenure can vary from a minimum period of 15 days to five years and above, but short tenured FDs continue to be the best bet. Even if a 3-year-long FD looks lucrative, it’s advisable to pick a short-tenured one. In a falling interest rate regime (like the current one), it is advisable to invest in longer tenure FDs with higher interest rate.
- Security:
These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option. Therefore, always pay heed to the rating before putting money into any such FD.
- Category of investor:
Senior citizens, shareholders and employees are generally entitled to a higher rate of return (say, 0.5%) than other general category retail investors.
- Taxation:
Company FDs offer the tax saver deposit, which qualifies as an eligible investment up to rupees one lakh (consolidated with other tax saving instruments), under section 80C of the Income Tax Act, for income tax deduction, with a lock in period of five years. TDS is deductible over and above Rs 5000.
- Rate of Interest:
The rate of interest on company FDs is normally higher than the rates offered by banks. This could be attributed to the element of risk involved while investing in a corporate FD as against a bank. As banks are subject to control of the Reserve Bank of India, bank deposits are fairly safer instruments.
- Regulations:
Deposits thus mobilised are governed by the Companies Act under Section 58A.
- Auto Renewal:
This facility preempts the need to remember the maturity dates of various deposits. The deposit is automatically renewed on maturity as per the depositor’s instructions. The risk of losing further interest on a matured deposit is thus removed.
- Liquidity:
Find out how the FD fares on the pre-mature encashment front, i.e., how easily would the investment be liquidated. Also enquire about the penalty clauses, e.g. is there a loss of interest and/or in principal amount.
- Additional benefits:
Fixed deposits from reputed entities offer additional benefits, e.g., they can be used as collateral for raising loans, premature withdrawal and cumulative accrual of interest is also allowed.
