Interest on corporate FDs adds to the investor’s income and is taxed as per the income tax slab. Corporate FDs may not be attractive to investors who fall in the higher tax slabs as the post-tax returns decrease.
New Delhi: Fix Deposit (FD) is a very popular investment option in India. But due to the fall in interest rates on bank FDs for the last few months, people are looking for an alternative, so that they can get better returns. Corporate FD is very popular among those who want a higher fixed return than bank FD. However, corporate FDs carry little risk. Investors can also start investing in AAA rated Corporate Fix Deposits (Corporate FD).
However, if you are an average investor, you are not advised to invest in corporate FDs due to high risk. Corporate FDs with AAA ratings like ICICI Home Finance Ltd and HDFC Ltd (HDFC Ltd) offer one to two per cent higher returns than bank FDs. An investor must know the three risks before investing in a corporate FD.
Income tax
Interest on corporate FDs adds to the investor’s income and is taxed as per the income tax slab. For investors who fall in the higher tax slabs, corporate FDs may not be attractive, as the post-tax returns decrease.
Risk of default
While investment in bank FDs is considered safe, corporate FDs carry more risk. This investment product guarantees neither the security of capital nor the payment of interest. If the company faces a financial crisis, as an investor you can also lose your money.
Pre-mature withdrawal
Most company FDs come with a lock-in period of three months, during which investors cannot withdraw. Even after completion of the lock-in period, pre-matured withdrawal means closure of the entire FD. Corporate FDs do not have any facility for partial withdrawal. In addition, an investor will lose some interest on withdrawals before the FD matures.
