Corporate Vs Bank FDs: Which Investment Offers The Best Returns?

Fixed deposits, or FDs, are a popular investment option in India, providing simplicity, guaranteed returns, and low risk. However, investors often face a dilemma between bank FDs and corporate FDs. Bank FDs provide unmatched security, while corporate FDs promise higher returns but come with added risks. Understanding the differences and assessing your priorities can help you make an informed decision.

What Are Fixed Deposits?

Fixed deposits are time deposits wherein a sum of money is locked in for a specific tenure by an agreed interest rate in advance. Both banks, as well as corporations, offer this FD, but they vary because of risk, returns as well as security.

Bank FDs

Bank FDs are the financial instruments offered by commercial and corporate banks with a regulatory wing of RBI. The deposit is perhaps one of the safest options around, as the returns offered are guaranteed, and its deposit insurance cover is up to Rs 5 lakh under the Deposit Insurance and Credit Guarantee Corporation (DICGC).

For example, if an investor puts Rs 1,00,000 in a one-year bank FD with a financial institution that offers 6.5 per cent interest, he/she will get Rs 6,500 as interest at the end of the maturity period.

Advantages of Bank FDs

Safety: Bank FDs are safe and secure investments because RBI has regulations and DICGC insurance is available

Returns: It provides stable returns since there is a fixed rate of interest, hence good for risk-averse investors

Repayment: Investors can select tenors from 7 days to 10 years to align investment with their objectives. Investors can select tenors from 7 days to 10 years to align investment with their objectives.

Risks of Bank FDs

Reinvestment risk: Declining interest at the time of reinvestment shall reduce the returns.

Inflation Impact: Fixed returns might not better inflation, thereby reducing buying power over time

Corporate FDs

Corporate FDs are released by NBFCs or corporations for the purpose of raising funds. Corporate FDs offer higher interest rates than bank FDs but carry higher risk as well. The credit ratings issued by agencies such as Credit Rating Information Services India Limited (CRISIL), Investment Information and Credit Rating Agency (ICRA), or Credit Analysis & Research Limites (CARE) will define the reliability of corporate FDs.

For example, if a corporation offers a one-year FD at a 9 per cent interest rate, the interest generated upon maturity from a deposit of Rs 1,00,000 would be Rs 9,000.

Advantages of Corporate FDs:

Higher Rates: Corporate FDs offer rates between 7 per cent and 10 per cent, attracting return-oriented investors

Growth Opportunities: Reinvestment options enhance the potential of compounding, thus enhancing returns

Customized Options: Loyalty bonus, senior citizen rate benefits, and online deposit options increase appeal

Risks of Corporate FDs

Credit Risk: The issuing company may fail to pay its dues if it has a low credit rating

No Insurance: Corporate FDs do not have any deposit insurance, which makes them riskier than bank FDs

Liquidity Constraints: Premature withdrawals often involve high penalties or may not be allowed in some cases

Taxation Differences

Bank FDs:

Interest income attracts TDS at 10 per cent if it exceeds Rs 40,000 in a financial year (Rs 50,000 for senior citizens). Investors can file Form 15G for individuals less than 60 years of age or Form 15H for senior citizens to avoid TDS if the total income is below the taxable limit

Corporate FDs

TDS is deducted at 10 per cent if interest exceeds Rs 5,000 annually. There is no provision to file Form 15G or 15H, which means TDS is deducted irrespective of the investor's income level, thereby affecting liquidity for those in lower tax brackets.

Key Factors to Consider 

When deciding between a bank FD and a corporate FD, it’s essential to evaluate your financial goals, risk appetite, and investment horizon.

Risk Tolerance: Conservative investors seeking safety and guaranteed returns should stick to bank FDs

Return Expectations: Those willing to take on additional risk for higher returns can consider corporate FDs, but only from issuers with high credit ratings

Liquidity Needs: Bank FDs allow better liquidity for pre-withdrawal than the corporate ones

Tax Implication: Take into account how the tax implications would operate and impact your post-tax returns

Bank FDs are the better choice for those seeking security as well as liquidity, but corporate FDs are also a good choice for willing risk-takers who understand that calculated risks will serve them better. First, take time to know the credibility of the corporate issuers and get their credit ratings before making an investment. Secondly, compare each option with your financial goals.