A Certificate of Deposit or CD is a fixed-income financial tool that is governed by the Reserve Bank of India and is issued in a dematerialized form. It is a type of agreement made between the depositors and the banks, wherein the bank pays an interest on your investment.
Certificate of Deposit is a short-term investment that comes with fixed investment amounts and maturity tenure ranging between 1-3 years. Given below are some of the important features of CDs and the method to buy a certificate of deposit.
Features of Certificate of Deposit
Here are some salient features of CDs and how they compare to other financial instruments.
- Certificate of deposit in India can be issued for a minimum deposit of Rs. 1 lakh or in subsequent multiples of it.
- Certificates of deposit are issued by the Scheduled Commercial Banks (SCBs) and All-India Financial Institutions. The Cooperative Banks and the Regional Rural Banks(RRBs) are not eligible for issuing a CD.
- There is a term period of 3 months to 1 year for CDs that are issued by SCBs, whereas the term period ranges from 1 year to 3 years for CDs issued by financial institutions.
- CDs in dematerialised forms can be transferred through endorsem*nt or delivery, similar to dematerialised securities.
- There is no lock-in period for a certificate of deposit.
- It is fully taxable under the Income Tax Act.
Certificate of Deposit - Key Highlights
Mentioned below are the important attributes of a Certificate of Deposit:
Certificate of Deposit Meaning | The Certificate of Deposit is the product that is offered by banks and credit unions that give an interest rate premium in exchange for the customer agreeing to lock in an amount for a predetermined period of time. |
Certificate of Deposit Interest Rates | Locked rates are the positive attributes of CDs, and they will provide a clear and predictable return to the Deposit over a time period. The bank will not, even later on - change the rate, making it a guaranteed return. |
CD Minimum Amount | The minimum amount of Deposit begins at Rs. 1,00,000. |
Tenure | This is the length of the period for the CD; for instance, it could be six months to years. The tenure ends on the date of the maturity; when the CD has matured completely, you will be able to withdraw the funds without a penalty fee. |
Eligibility Criteria |
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Taxes | Certificates of deposits are completely fully taxable in the hands of investors under the Income Tax Act. |
Opportunity for Loans | A depositor can get loans against CDs, except for the permitted explicitly by the RBI. The issuer is given to buy back CDs before maturity at the prevailing market price. The investors could opt for accepting or rejecting the CDs purchased back offer as per wants. |
How to Buy a Certificate of Deposit?
The process of buying and selling CDs is similar to that of buying and selling shares, and the steps are mentioned below:
- Step 1: The seller and the buyer need to agree on the price and the quality of the transaction.
- Step 2: The seller will authorise its depository participants through the delivery instructions slip.
- Step 3: The slip will be inclusive of the instructions to debit the seller's account and transfer the CD to the account of the buyer.
- Step 4: In the case of any confusion, you can also get assistance from a professional.
Benefits of Issuing a Certificate of Deposit in India
The advantages of issuing a certificate of deposit are mentioned below:
- A certificate of deposit does not consume capital for market volatility, and it is a completely secure financial instrument with assured amounts at the time of maturity. The money that is deposited would continue to predict an increase. It also offers a lot of larger interest rates on a lump sum investment.
- CDs offer you monthly payouts, annual payouts, or also a lump sum payout during withdrawal at maturity. You could choose the tenure and price you want to be invested for, and though there are certain parameters set by the bank, it will help to tailor the investment instruments to your needs.
- There are usually no additional costs or fees that are associated with a CD, and you only pay your investment.
Certificate of Deposit vs Fixed Deposit
The table below shows a comparative analysis of the certificate of Deposit and fixed deposit in terms of investment amount, tenure, and returns.
CD vs FD | ||
Criteria | Fixed Deposit | Certificate of Deposit |
Minimum Investment Amount | The minimum investment amount for a fixed deposit is Rs. 1000. | The minimum deposit amount for a CD is Rs. 1 lakh. |
Return on Investment | It ranges from 3.5% to 8%. | The interest rate on CDs, if issued by organisations, has higher interest rates as compared to commercial banks. |
Investment Tenure | It is a long-term investment and offers a maximum maturity period of 10 years. | This is a short-term investment and offers a maturity period ranging from 1-3 years. |
Collateral | One can apply for a loan against FD. | One cannot apply for a loan against a CD. |
Comparison of FD rates
Name
Tenure
Highest Interest Rates
As a financial expert with a deep understanding of fixed-income instruments, including Certificates of Deposit (CDs), I can provide you with comprehensive insights into the concepts discussed in the article.
Certificates of Deposit (CDs) are indeed a fixed-income financial tool governed by the Reserve Bank of India (RBI). Here are some key points related to the concepts used in the article:
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Features of Certificate of Deposit:
- CDs are issued for a minimum deposit of Rs. 1 lakh or in subsequent multiples.
- Issued by Scheduled Commercial Banks (SCBs) and All-India Financial Institutions, excluding Cooperative Banks and Regional Rural Banks (RRBs).
- Term periods vary, with SCBs issuing CDs for 3 months to 1 year and financial institutions issuing CDs for 1 to 3 years.
- CDs in dematerialized form can be transferred through endorsem*nt or delivery.
- No lock-in period for a certificate of deposit.
- Fully taxable under the Income Tax Act.
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Certificate of Deposit - Key Highlights:
- CDs offer an interest rate premium in exchange for locking in an amount for a predetermined period.
- Locked rates provide a clear and predictable return over the specified time period.
- Minimum deposit amount starts at Rs. 1,00,000.
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Eligibility Criteria:
- CDs are issued by scheduled commercial banks and selected financial institutions.
- Issued to individuals, corporations, companies, and funds.
- CDs can be issued to NRIs but on a non-repatriable basis only.
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Taxes:
- CDs are fully taxable in the hands of investors under the Income Tax Act.
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Opportunity for Loans:
- Depositors can get loans against CDs, except as explicitly permitted by the RBI.
- The issuer can buy back CDs before maturity at the prevailing market price.
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How to Buy a Certificate of Deposit:
- Similar process to buying and selling shares.
- Agreement on price and quality of the transaction.
- Seller authorizes depository participants for the transfer of CDs.
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Benefits of Issuing a Certificate of Deposit in India:
- CDs do not consume capital for market volatility and are a secure financial instrument.
- Assured amounts at the time of maturity with the potential for higher interest rates.
- Flexible payout options, including monthly, annual, or lump sum payouts.
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Certificate of Deposit vs Fixed Deposit:
- Comparative analysis with Fixed Deposits in terms of investment amount, tenure, and returns.
- CD minimum investment amount is Rs. 1 lakh, while FD minimum is Rs. 1000.
- CD offers short-term investment with a maturity period of 1-3 years, while FD is a long-term investment with a maximum maturity of 10 years.
- CD may have higher interest rates compared to commercial banks' FDs.
In summary, Certificates of Deposit in India provide a secure and flexible investment option with varying terms and features. They offer investors the opportunity for predictable returns over a specified period.
