Fixed deposits have traditionally been very popular with most investors since they offer low risk, steady returns and high liquidity.
There are two types of fixed deposits available viz: company fixed deposits and bank fixed deposits.
Let us closely look at the difference between the two on important parameters:
1. Interest rates
Interest rates on bank deposits are determined by banks and are as per the interest rates movements by RBI as well as the liquidity needs of each bank.
Within banks co-operative banks offer higher interest rates than public and private sector banks. Risk in co-operative banks is also higher when compared to the public and private sector ones.
Company fixed deposits offer higher interest rates than banks as companies compete with banks to attract investor money.
Interest payment frequency varies from monthly to quarterly to semi-annual to annual in case of both bank and company fixed deposits. Investor has the facility to get the interest credited to their bank accounts.
Bank deposits are guaranteed upto Rs 1 lac per account holder per bank as deposit insurance is taken by the bank with the Deposit insurance and Credit Corporation of India, which is a subsidiary of RBI.
In the past, RBI has played an active role in the merger of failed banks with successful ones and has not allowed depositors money to be lost in case of a bank failure.
Corporate fixed deposits are unsecured in nature and are not guaranteed by the issuing company.
Most companies get their fixed deposits rated from rating agencies to give a comfort factor to the investors.Higher the rating, stronger is the company.
AAA rating is the highest available. It is recommended to invest in company fixed deposits which are rated AAA as lower ratings means higher risk of default.
Both company and bank fixed deposits are liquid though in case of company fixed deposits some companies do not allow anytime withdrawal. Investors need to read the application form carefully before investing.
But both of them offer a “loan against FD” facility.
Interest earned is fully taxable.
Banks deduct tax at source (TDS) on deposits if the total interest earned on all fixed deposits / recurring deposits in a bank (at all branches of the bank) is more than Rs.10, 000 in a financial year.
TDS is deducted at the rate of 10% if PAN is submitted or else it is at the rate of 20%
In case of company fixed deposit, the TDS limit of the interest earned is caped at Rs 5,000in a financial year.
The companies would deduct tax at source if the interest earned in a financial year exceeds Rs 5,000 as per the tax slab of the individual.
Distributing the FD investments across various companies so that the interest earned does not exceed the permissible level is an effective option to avoid TDS
Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.