Last month RBI had cut its Repo rates which lead most banks to reduce their interest rates on fixed deposits. An alternative to lock in higher interest rate is to invest in fixed deposits offered by companies.
But before you get excited at getting higher interest rates here are some points to keep in mind:
Evaluating Corporate FDs:
You can evaluate Corporate FDs based on following 4 points:
Credit Rating: Companies are rated by rating agencies like CRISIL, CARE, FITCH which tells us how credit worthy is the company. “AAA” is the best ratings possible which indicate excellent credit worthiness and almost no concerns regarding timely interest and principal repayment. Ideally retail investors should not invest in low rated companies (i.e. Invest only in AA and AAA rated companies).
Liquidity Needs: The deposits you make in a company have certain terms and conditions. So it’s not always easy to withdraw prematurely as in case of Bank FDs. Most companies have a minimum lock-in for 3 months from the date of deposit.
Penalty Clause: Premature withdrawal may not only yield you lower interests but companies can also subtract the prorated commission they paid to their agents.
Promoters and Management of the company: Government owned companies are much safer to invest as it won’t let the company default in most of the case (at least to retail investors). So investors can also invest in government companies with ‘A’ rating. Also never invest in companies who themselves or companies belonging to that group have ever defaulted on interest/principal payments.
While investing in Company FDs you will need to choose two things:
Tenure of Deposits: The FDs are offered for 1 to 10 years duration. Keep in mind that longer term duration are more risky as the company credit rating can change with time.
Interest Payments: Companies have option to pay interest monthly, quarterly, half-yearly, annually and at the time of maturity. You need to select when you want interest to be paid depending on your financial goals.
List of Corporate FDs:
The table below has the details of interest rates offered by different companies. The best interest rates have been shaded in Green.
The table also has the fixed deposit interest rates offered by two biggest banks – SBI and ICICI, so that you can benchmark the returns.
- Dewan Housing Finance (DHFL), Gruh Finance and PNB Housing Finance offer FDs up to 10 years duration.
- Companies offer additional interest rates up to 0.5% for Senior Citizens, Shareholders and employees.
- Companies also offer Loan on these deposits with certain conditions.
- Some companies like DHFL also offer Recurring Deposits.
How to invest in Company FDs?
In case you decide to invest in the above companies you have 3 options:
- Visit the company branch in your city with cheque and KYC documents and complete the formalities
- Download FD forms from the respective company website, fill it and deposit it along with cheque and KYC documents
- Invest through intermediaries like Bajaj Capital, FundsIndia or your neighborhood agent
You would need to submit documents for identity and address verification for KYC. PAN card is mandatory and also serves as proof for identity and signature. You also need passport size photograph.
Tax on Company FDs:
The tax treatment for company FDs is same as Bank Fixed Deposits. The interest income is added to the income of investor and taxed at marginal income tax rate.
Company deducts TDS (Tax Deduction at Source) in case the annual interest paid is more than Rs 5,000. You can attach Form 15G/15H during the application stage, in case you want the company not to deduct TDS.
As you can see in the table above that companies like Bajaj Finance, Dewan Housing Finance (DHFL), Shriram City Union Finance and Shriram Transport Finance FDs offer interest rates that are higher by 1% from bank deposits for different tenures.
You might want to evaluate these companies for your fixed deposits. But keep in mind that pre mature withdrawal may not be as easy as banks FDs.