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Company Deposits

Someone said, a rupee saved is a rupee earned. He could not have been wiser. Deposits earn interest and grow the deposited rupee over a period of time to a value far more than the initial deposit.

Someone said, a rupee saved is a rupee earned. He could not have been wiser. Deposits earn interest and grow the deposited rupee over a period of time to a value far more than the initial deposit.

Features
Eligibility
• Resident Indians
Entry Age
• 18 years or older
• Minors can open an account with the natural guardian operating it
Investments
• Minimum: Rs 1,000 per annum
• Maximum: No limit
Interest
• Depends on tenure of the deposit and the issuer
Account holding
• Individual
• Joint
• As specified by the issuer
Nomination
• Facility is available

Like bank fixed deposits, company fixed deposit is a deposit with financial institution and non-banking finance companies (NBFC) for a fixed rate of return over a fixed tenure. The rate of interest depends on the maturity tenure and these deposits are governed by section 58A of the Companies Act.

Investment Objective and Risks

The prime objective of investing in company deposits is to earn a higher interest rate compared to bank fixed deposits. They are a good source of regular income by means of monthly, quarterly, half-yearly, or yearly interest incomes.

Capital Protection
The capital in the company fixed deposit is not protected because these are not secured like most bank deposits.

Inflation Protection

The company deposit is not inflation protected, which means whenever inflation is above the guaranteed interest rate offered by the deposit; the deposit earns no real returns. However, when the interest rate is higher than inflation rate, it does manage a positive real rate of return.

Guarantees
The interest rate on the company deposit is guaranteed as long as the company can manage to pay the depositors. However, company deposits are known to delay and at times default on payments.

Liquidity
The company deposit is liquid, despite the stipulated lock-in that deposits have. The liquidity is offered in the form of withdrawals subject to conditions.

Credit Rating
A company deposit has to have a credit rating, which they can obtain from any of the credit rating agencies such as CRISIL, CARE or ICRA.

Exit Option
Premature encashment of the deposit is permissible.
• If a lender such as a bank or NBFC is willing to accept the company deposit as collateral; you can pledge the deposit to obtain loans, the amount and rate at which the loan is permitted depends on the lending institution.
• A company deposit can be prematurely encashed and each company deposit has different charges on exit that is governed by the time that the deposit has been held for.

Other Risks
Savings in this product is risky because deposits are not secured.

Tax Implications
The sum invested in a company deposit or the interest that it earns is not eligible for any tax concessions. The interest earned on a deposit on a yearly basis is added to the total income under the head ‘Income from other sources’ and taxed accordingly.

Going Online
Most company deposits are offered offline, unless it is being sold online through a broking account.

Where to open a Deposit
Deposits can be made directly with the companies offering the deposit or distributors selling the same.

How to Buy
Once you have decided on the sum that you wish to invest and the tenure:
• In case of default by a company, the investor cannot sell the deposit documents to recover his investment.
• The investor has no claim over the assets of the company in case the company is wound-up. This makes a company fixed deposit a risky option to invest in.
• You need to fill the deposit application form available with the company.
• Carry original identity proof for verification at the time of buying.
• You can invest in deposits with cash, cheque or demand draft drawn in favour of the company or the specified entity.

Points to Ponder
• Company deposits are risky
• No TDS in case the interest is only Rs 5,000 in a financial year
• Interest income is offered monthly, quarterly, half-yearly, or yearly
• The recourse in case of delays or defaults are not very tight or regulated

To spread the risk of holding company deposits, make deposits with different companies for different tenures to minimise risks.

Tips and Strategies
• The assured return on company deposits like any deposit, can be used to create an income ladder. Certificates can be bought every month or quarter for appropriate denominations, which on maturity will act as a steady income stream.
• To spread the risk of holding company deposits, make deposits with different companies for different tenures to minimise risks.