Consider opting for extended durations in FDs offered by NBFCs with enhanced credit ratings

As a strategy, non-banking financial companies (NBFCs) are boosting their fixed deposit (FDs) rates to gather funds, it would compensate for reduced borrowing from bank. For depositors interested in investing in high-rated corporate bonds, choosing longer FD tenures can be advantageous. This approach aligns with seeking higher yields. On the other hand, individuals aiming for increased returns from investments in lower-rated issuers might consider shorter FD tenures to mitigate associated risks. In essence, the choice of FD tenure depends on the desired balance between yield and risk tolerance.

Before you get associated with any company, to know the financial health of a company is pivotal in assessing its ability to honour its obligations, including the repayment of interest and principal amounts associated with its fixed deposits (FDs). Consequently, depositors should prioritize checking the credit ratings of the company before investing. Higher credit ratings typically signify greater financial stability and a reduced likelihood of default.

Furthermore, when deciding on the tenure of their investment, investors should strike a balance between liquidity needs and the desire for returns on investment. Opting for longer tenures may offer higher interest rates but could tie up funds for an extended period, limiting liquidity. Conversely, shorter tenures provide quicker access to funds but may offer lower interest rates. Thus, selecting a tenure that aligns with both liquidity requirements and return expectations is crucial for investors.

Similar to bank fixed deposits (FDs), there are also corporate fixed deposits (FDs), which often impose penal rates for premature withdrawals. This means that if investors withdraw their funds before the agreed-upon maturity date, they may incur penalties or receive reduced interest rates on their investment. The interest income earned from corporate FDs is subjected to taxation based on the investor’s applicable income tax slab. The interest earned is added to the investor’s total income for the year and taxed at the respective slab rate. It’s important for investors to consider this tax liability when evaluating the overall returns from corporate FDs and to factor it into their investment decisions.

Also, when the interest income from both bank and corporate fixed deposits exceeds Rs 40,000 in a financial year (or Rs 50,000 for senior citizens), a tax deduction at source (TDS) of 10% is applicable.