Most Indian households consider fixed deposits(FDs) to be the most trusted and safest mode of investment. FDs have fared better than savings account in terms of return on investment (ROI) and have been the most preferred investment avenues for investors with low-risk appetite. This secured mode of investment ensures guaranteed returns throughout the scheme tenor.
While most prefer to invest in bank FDs, a variant of this term deposit is emerging an attractive option for investors. These are company fixed deposits and are like bank FDs with a definite tenor, fixed interest rate and low investment risk. This financial instrument is available in both cumulative and non-cumulative alternatives with monthly, quarterly or annual interest pay-out options.
So why is a company FD considered to be better than a bank FD? Read on to know the answers:
- Competitive interest rates
As per the prevalent market conditions, company FDs offer comparatively better ROI due to a higher rate of interest. While bank FDs are typically offering 6.5 to 7.5% returns, investors can gain additional 0.5 to 1% returns from company FDs. While this might seem like a nominal increase in percentage, investors stand to gain substantially from the compounding effect.
Certain company FDs like the Bajaj Finance Fixed Deposits scheme offers an additional 0.35% hike on the prevalent interest rates for senior citizens. These FD interest rates are higher than the market average. However, FD interest rates differ from lender to lender, hence it is essential to compare the available options for the best offer. Investors can utilise this Fixed Deposit Interest calculator to find out the maturity amount provided by company FD.
- Minimal risk involved
Both bank FDs and company FDs are subjected to a minimal risk. Bank FD holders stand to lose out on their money in case the bank declares insolvency. Under such circumstances, the Deposit Insurance and Credit Guarantee Corporation (DICGC) owned by the Reserve Bank of India (RBI) is liable to pay the amount. However, DICGC is liable to pay only a maximum amount of Rs.1 lakh.
Company FDs, on the other hand, are regulated by the Section 58A of the 1956 Companies Act. As per these sections, if the corporate firm dissolves itself, it should pay off its shareholders and FD holders, thereby minimizing the loss incurred by investors.
- Withdrawal flexibility
Typically, both bank FDs and company FD (Fixed Deposit) can be withdrawn prematurely that is before completion of the maturity period. But certain banks offer FDs with no premature withdrawal facility and therefore investors need to watch out for this clause before opting for bank FDs.
Broadly all company FDs enable investors to conduct pre-mature withdrawal post completion of six months of the stipulated tenor. Investors will be required to complete the paperwork and other formalities as per the specific company rules to receive the funds.
But remember pre-mature withdrawals attract a penalty fee to be paid by the investor and erodes the investment corpus to some extent. Experts advise against such drastic steps, unless absolutely necessary.
A company FD also enables investors to claim tax benefits as per the Indian Income Tax Act of 1961. One can enjoy a TDS exemption of up to Rs.5,000 on the annual interest earned, with the remaining amount taxable at 10%. However, if the investor falls under the 0% tax bracket, he/she can claim additional benefits by submitting Form 15H each financial year.Tags: FD (Fixed Deposit)