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For safe and secure investment we park our money in fixed deposits (FD). FDs are secure but the return is a bit low. But if we have an option investing in FDs with slightly higher interest rates, that would be great.

Corporate FDs offer such an avenue. Corporate deposits are similar to bank FDs. These deposits are offered by companies and carry higher interest rates.

Corporate FD

It is one of the ways by which companies, mostly NBFCs, raise money from the market to meet their business needs.

Companies such as Bajaj Finserv, HDFC, ICICI, Shriram Properties etc offer these types of FDs with higher interest rates than banks.

Higher return

Considering the risks involved in the business they pay higher interest rate to attract investors. Generally in corporate FD interest rate varies from 6% to 8.5%, depending on the amount and the tenure of the deposit.

The interest rate of corporate FD is as high as 7% for five-year tenure.

Consider an FD for five years with SBI. It will give you a return of 5.4%, whereas Bajaj Finserv FD rate for the tenure is 7.2%. Shriram Finance would give you a whopping 8.4% interest annually for the same tenure.

Risk involved

Always remember that money deposited is at risk if the company defaults. Experts say that the risk of investment is generally directly proportional to the rate of interest.

It is important to note that all NBFC/companies that want to collect deposits have to adhere to regulations and guidelines laid down by the RBI and ministry of corporate affairs. But still one should check the company’s rating before investing.

Rating agencies such as CRISIL, ICRA give ratings to companies that can collect deposits from the public. These agencies look at the track record of the company, whether the interest rate and the repayment schedules are revealed to the investors while collecting the deposits, etc.

The companies are given ratings like AAA, AA, BBB, and so on. AAA is the highest rating and indicates the company has a solid balance sheet. The NBFC/companies have to maintain a minimum BBB rating to collect deposits from the public.

Flexibility

The tenure of a corporate fixed deposit usually ranges between one and seven years. And you have the flexibility to choose any duration within that range. So if your goal is one year away, you can invest for one year.

If you need to meet some long term, you can choose the tenure accordingly. You also get this facility in banks too.

Premature withdrawal

As per RBI guidelines, all fixed deposits need to have a minimum penalty period of three months. That is, if you withdraw your money within the first three months of starting your investment, you will have to pay a penalty for early withdrawal.

Beyond that, it is up to the bank/NBFC/company to decide for how long its penalty period would be.

The penalty period for corporate FDs is usually lower than bank FDs. For corporate FDs withdrawal after six months is permissible, subject to the company’s rule and regulations.

Tax compliance

Interest earned from the corporate FDs is taxable as ‘Income from Other Sources’ and are taxed according to your slab rate. It means if the gross income is within 10% tax bracket, then you will have to pay a tax of 10% on interest income.

If the tax slab rate is 30% then the higher tax rate needs to be payable in every fiscal year. No TDS is levied on this income.

Expert take

“For short to medium term investment corporate FD is a good alternative option to putting your money in debt and mutual funds. But one should check the company’s rating before investing,” advised Arvind Agarwal, CFA.

In these FDs a degree of risk is involved and the investor should take that into consideration. It is better to invest maximum 10%-12% of your total investment into corporate FDs, not more than that, added Agarwal.