Lower interest rates on bank FD? Consider these company FDs

Anil ChopraBajaj Capital

In current scenario, when the bank interest rates are coming down, company fixed deposits (CFD) are gaining popularity, especially among the investors looking for fixed income. Senior citizens who are retired look for regular income options and find CFDs, a suitable avenue to park their retirement funds. Even non-retirees, looking to park funds for short period at high rates, opt for CFD's. 

What is on offer-

Currently, there are several CFD's offering attractive interest rates, especially over longer period of tenure. There are various AAA rated companies assuring higher safety and liquidity along with the high interest rates. As an investor, one can look to park a portion of his investible funds in such avenues. At present, company deposits offer about 1-2 percent additional interest rate compared to bank deposit of similar tenure. Few companies like Shriram Transport Finance and Dewan Housing Finance are offering interest rate of around 10.25 per cent per annum for senior citizens over a tenure of 3 years and above and 9.50 per cent for 1-2 years.

Which tenure is good – 1 year or 3 year? Choice of tenure depends on the requirement of funds. A better approach could be stagger one's investment across different tenures. Instead of locking in entire lump sum in a fixed tenure, invest some portion for 1-year, a small portion for 2-years and similarly for 3-year. In falling rate scenario, this helps in benefiting in terms of rates and also provides liquidity.

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Anil Chopra

Group CEO & Director|Bajaj Capital

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Before investing in company fixed deposits, one should be aware of the risks involved. While choosing a fixed deposit, investor should initially check the rating. Remember, high rating may not necessarily guarantee return of capital but still indicates relative safety.

Should you go for rated company deposits? Credit ratings have been made mandatory for all companies, including NBFC and manufacturing companies, before they can raise deposits from public. The new Companies Act, 2013 has therefore made CFD's much safer under the Companies (Acceptance of Deposits) Rules, 2013.

Further, a provision for a deposit insurance up to Rs 20,000 is put in place. Also, only those companies having a net worth of not less than Rs. 100 crore or a turnover of not less than Rs. 500 crore have been allowed to accept deposits from public.

How to choose a fixed deposit? Due diligence by investor is also necessary before he commits his hard earned money to companies deposits. Examine the company's profitability and other financial. Also, do not go for low rating CFD merely for a 1-2 per cent high return. They would be more risky compared to highly rated CFD. Remember, they are unsecured in nature and hence default risk could be high unless companies are reputed and have a strong promoter background. To be on the safer side, diversify the investment in different companies rather than putting the whole amount in single company. Its better to invest not more than 5 per cent of one's total net worth in one single company.

Taxation treatment. Typically, there is no tax benefit on investments made in such CFD. However, there are few CFD such as National Housing Bank Suvriddhi Scheme and HUDCO 5- years deposits, in which amount invested qualifies for tax benefit under section 80C. On the other hand, the interest income in company fixed deposit is taxable as per one's income tax slab. Also, there is a TDS of 10 per cent, in case total interest exceeds Rs. 5,000 in a financial year. This can be avoided by furnishing form 15 G/H, if applicable.