A company deposit or a company fixed deposit aims at providing interest higher than a bank fixed deposit. Let us learn more about it.
Like a bank fixed deposit, a company fixed deposit is a deposit with a company, typically a non-banking finance company (NBFC) at a fixed rate of return over a fixed tenure. The rate of interest depends on the maturity of the tenure. Company fixed deposits are governed by Section 58A of the Companies Act.
Features of company deposits
The capital in a company fixed deposit is not protected if the company is unable to meet its financial obligations.
The company fixed deposit is not inflation-protected. This means that 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 the inflation rate, the company fixed deposit does manage a positive real rate of return.
Investment objective and risks
The prime objective of investing in a company fixed deposit is to earn a higher interest rate compared to a bank fixed deposit. Company fixed deposits are a good source of regular income, the frequency of which could be monthly, quarterly, half-yearly or yearly.
Suitability and alternatives
The interest rate on the company fixed deposit is guaranteed as long as the company can manage to pay the depositors. However, company fixed deposits are known to be delayed and at times, companies default on payments.
Company deposits are liquid to the extent that companies may permit depositors to prematurely terminate their deposits by paying a penalty.
A company fixed deposit has to have a credit rating from a credit-rating agency, such as CRISIL, CARE or ICRA.
Premature encashment of the deposit is permissible but the penalties imposed for such encashment are generally higher than those imposed for bank fixed deposits.
The sum invested in a company fixed 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 and taxed accordingly.
Most company fixed deposits are offered offline. At times, they are sold online through a broking account.
Where to make deposits
Deposits can be made directly with the companies offering them or through the distributors selling them.
How to buy
Tips and strategies