All You Need to Know About Investing in Company Deposit Schemes

Financial institutes in India offer various forms of term deposits, one of which is a Fixed Deposit. This is a risk-free mode of investment with guaranteed returns and a pre-decided lock-in period. Company deposit schemes are a variant of FD, generally offered by manufacturing companies, non-banking financial companies (NBFCs) and other corporate firms. Popularly known as Company FD, these too offer a fixed return on investment over a specific time.

How do these deposit schemes work?

You deposit a certain sum with your preferred financial institution, for a pre-decided tenor, at the applicable interest rate. The interest is payable at monthly, quarterly or annual intervals based on the option you choose. Just like FDs, Company Deposit Schemes also offer cumulative and non-cumulative options.

Cumulative company deposits: The interest is compounded annually and is paid only after completion of the lock-in period. The interest earned is taxed based on your tax slab.

Non-cumulative company deposits: Interest is compounded on a monthly/quarterly/half-yearly or yearly basis and has similar interest payout options. This is most suitable for individuals in need of a regular income source.

Features of company deposit schemes –

High rate of interest: Banks usually offer an interest of 4 to 6% on savings account and a maximum of 7.8% on government certificate schemes. But corporate deposit options offer comparatively better returns, and offer additional benefits for senior citizens. Utilize this FD interest rate to gauge the return on investment (ROI).

Interest rate differs from company to company: Similar to banks providing FDs, corporates also offer varying rates of interest, investors can compare the rates online to choose the most competitive one. However, do not blindly rely on the interest offered as the sole criteria for selecting your preferred vendor. Remember to compare the present financial condition of the company as well as their reputation in the market. Conduct thorough research or consult a financial planner to achieve the same.

Low-risk option: There are multiple investment options available in the market. However, there are fewer options for investors with a low-risk appetite. Company fixed deposits offer a low-risk option for investors looking for high returns at minimum risk. Unlike market-linked funds, these deposit schemes do not run the risk of succumbing to volatile market conditions.

Lock-in period: Similar to FDs these financial schemes also have a definite lock-in period.

This is mainly to reduce the risk of investors abruptly withdrawing money from these corporate deposits. This associated risk is known as default risk and is borne by companies offering such deposit schemes.

Renewal benefits: Financial institutes offer renewal services after completion of the scheme tenor. On renewal, additional interest of 0.25% is paid over and above the applicable rate.

Hence you will earn 0.25% more interest on the principal amount, in addition to the cumulative interest. Utilize this FD calculator for a detailed idea of the ROI.

Regulating body: While FDs issued by banks are regulated by RBI as per the Banking Regulation Act of 1947, corporate deposits are regulated as per the Section 58A of the Companies Act of 1956. As per the Companies Act, if the corporate entity is being dissolved, the firm should focus on paying off the shareholders and fixed deposit holders to minimize the loss of the investors.

No pre-mature withdrawal before completion of six months: Most corporate deposit schemes do not allow you to conduct pre-mature withdrawal before completion of the initial six months. But, investors can withdraw funds before completion of the lock-in period (after 6 months), while incurring a penalty. The investor has to complete the necessary paperwork and follow the withdrawal process to ensure smooth disbursal of funds.

TDS exemption: A company deposit scheme also enables you to gain tax benefits. All deposits with the annual interest payable of Rs.5,000 and below in a financial year can enjoy exemption from tax deducted at source (TDS). If the annual interest paid is beyond Rs.5,000, then the investor will have to face a TDS of 10% on the interest earned. In case the investor falls in a 0% tax bracket, he needs to submit a duly filled Form 15H every year to continue enjoying the tax benefit.

Provision for assigning nominee: When you enroll for a company deposit scheme, you must assign a nominee to the sum offered on maturity. This nominee is the legal heir of the deposit scheme in the event of the demise of the scheme holder within the lock-in period.

Investors can also opt for jointly owning a scheme wherein, in case of the demise of one of the scheme holders, the amount is paid to the other depositor.

Before investing in any deposit scheme remember to study the scheme documents thoroughly, paying special attention to the withdrawal clause and company-related information.