You have saved some money and want to make it grow while keeping it safe. Fixed Deposits (FDs) are an appealing option, yet choosing between bank FDs and corporate FDs can make a substantial difference in your returns.
Hence, understanding the differences between these two options is key to making informed decisions.
Bank FD vs Corporate FD: What to choose?
Here are the five differences you must consider when choosing between a bank and a corporate FD.
Interest rate
Bank Fixed Deposit rates or FD rates typically range between 3% and 8%. The rate varies based on your investment amount, maturity tenure, and age. If you are a senior citizen, you may enjoy a higher rate on each investment and tenure slab.
On the other hand, corporate FD rates can go up to 10%. But keep in mind that, usually, in corporate FDs, companies that offer higher interest rates to attract investors may not always have sound finances and can default on payments.
Tip: Consider investing in a corporate FD; you thoroughly analyse the issuing company’s financials before making any decision.
Risk and safety
Whether you park your funds in a Savings or Fixed Deposit Account, the DICGC – Deposit Insurance and Credit Guarantee Corporation offers insurance of up to ₹5 lakh per depositor. If the bank shuts down in the worst-case scenario, you can get a refund of your entire investment if it is below ₹5 lakh.
On the other hand, corporate FDs are considered a bit riskier. You will lose your investment if the issuing company defaults on its payment.
Tip: When investing in corporate FDs, review the credit rating issued by recognised institutions like CRISIL. The higher the rating of the corporate bond, the lower the risk it carries.
Liquidity and tenure
Bank FDs have flexible investment tenures. For example, you can choose a tenure ranging from 7 days to 10 years. When it comes to liquidity, a premature withdrawal option is available, but it attracts a penalty deducted from your investment’s value.
Corporate FDs, on the other hand, are almost similar to bank FDs in terms of lock-in periods and tenures.
Tip: Follow a laddering strategy and assess your current financial condition to spread your capital across different FD tenures.
Suitability for different investors
Bank FDs are ideal for conservative investors who prefer safety over assuming risks for higher returns. On the other hand, if you are willing to take some risk but do not want to deal with the highly volatile stock market, you can consider corporate FDs with a good credit rating.
Tax benefit
Interest from both Bank and Corporate FDs is taxed under “Income from Other Sources,” meaning it is included in your total taxable income and taxed according to your income tax slab.
Certain Bank FDs provide tax-saving opportunities under Section 80C, allowing deductions of up to ₹1.5 lakh for 5-year terms.
On the other hand, tax benefits are not available for Corporate FDs. Thus, Bank FDs present a better option for tax-savvy investors.
Conclusion
Ultimately, the choice between bank FDs and corporate FDs goes beyond the FD rate it carries. It comes down to your individual financial situation and goals. Bank FDs offer safety and stability, making them ideal for conservative investors.
In contrast, corporate FDs provide higher returns but come with increased risk. Assessing your risk tolerance, financial goals, and the specific terms of each FD will help you make the best decision for your investment strategy.
