Company FDs in India | Company FD vs Bank FD

Published on Thursday, March 5, 2020 by Chittorgarh.com Team

Company Fixed Deposits (also called Corporate Fixed Deposits or CFDs) are a good investment choice for investors who want steady returns at minimal risks. It is also an excellent choice for senior citizens who are looking to get returns better than bank deposits. This article discusses what is a company FD, its various features, the difference between company FD and Bank FD etc.

Company Fixed Deposit (CFD) Meaning

A company or corporate FD is nothing but similar to bank FDs which are issued by companies like finance companies, housing finance firms or other types of Non-Banking Finance Companies (NBFCs) for different tenures and with a different frequency of interest payments. They are placed by investors with companies for a fixed term carrying a fixed rate of interest. CFDs are like unsecured loans borrowed by a company from the investors.

Types of Company FDs

There are two types of fixed deposit schemes:

• Cumulative: In the cumulative CFDs, interests are accumulated along with the principal amount and the entire amount is paid at the end of the term. No payment is made within the investment term.
• Non -Cumulative: In Non-Cumulative CFDs, interest earned is paid on a regular basis. It can be monthly, quarterly, half-yearly or annually depending on the investors choice.

Company Fixed Deposits - Key Features

1. CFDs have fixed-term and offer a fixed rate of returns.
2. Investors can invest in different tenures ranging from months to years.
3. Interest payments are paid monthly, quarterly, half-yearly and yearly.
4. Premature withdrawals are allowed. 
5. Companies offering CFDs are rated by rating agencies like CRISIL & ICRA.
6. CFDs are governed by Section 58-A of the Companies Act 1956.

Corporate Fixed Deposit Advantages

CFDs offer many benefits to an investor including-

• Higher Returns- Company Fixed Deposits offer higher interest rates when compared to banks.
• Multiple Interest Payout Options- They offer a number of interest payout options to choose from such as monthly, quarterly, half-yearly, and yearly.
• Tax Benefits- Interest earned up to Rs 5000 in a year is exempted from TDS.
• Regular Income- CFDs are a good source to earn steady income monthly, quarterly, half-yearly or yearly.
• Loan against deposit- Investors can avail a loan up to 75% of the deposit amount after 3 months from the date of deposit.
• Diversification- CFDs are useful in investment diversification, especially for low-risk investors who have limited investment options.

Company Fixed Deposit Disadvantages

An investor must consider the following factors before investing in a CFD-

• Risky Investment- CFDs are not entirely risk-free. Companies offering CFDs may default on interest and principal repayment due to bad financial position. CFDs are governed by the Companies Act, according to which, if a company is winding up, the first preference for repayments is given to shareholders rather than the fixed deposit holders.
• Penalty for Preclosure- Most companies will levy a penalty fee for preclosure of the accounts.
• Taxable-Interest earned on CFDs above Rs 5000 are taxed as per the tax bracket of the investors. TDS is deducted at 10% for investors. Investors falling in zero/nil tax bracket, need to submit Form 15H every financial year to avoid TDS deduction.

Taxation on Company Fixed Deposits

The interest earned on CFDs is taxable falls in the 'income from other sources' category of an investor. TDS is deducted for interest amount exceeding above Rs 5,000 a year. Investors falling in zero/nil tax bracket, need to submit Form 15H every financial year to avoid TDS deduction.

Key Takeaways

1. CFDs are fixed-term deposits offering a fixed rate of returns. They are of two types- Cumulative and Non-Cumulative.
2. CFDs are issued by manufacturing companies and NBFC. Each CFD is rated by the rating agencies.
3. CFDs offer higher returns than bank deposits. However, these are also riskier than bank deposits.
4. TDS is deducted for interest earned above Rs 5,000 a year on CFDs.

Who Should Invest in CFDs?

• CFDs are excellent investment instruments for investors who are looking for stable returns without too many risks. 
• Senior Citizens can also benefit from CFDs as it can help them earn a regular income.