Fixed Deposit vs Certificate of Deposit: Key Differences (2024)

Fixed Deposit (FD) is an investment scheme in which you can invest a lump sum amount for a specific tenure for a fixed interest rate. Banks, Non-Banking Financial Companies (NBFCs), and post offices offer FD schemes. The interest rate remains the same throughout the tenure, so you get assured returns. The interest rate depends upon the investment amount and tenure and it varies from bank to bank.

Moreover, senior citizens are offered higher interest rates on their investments in an FD scheme. Also, FDs placed with a bank are insured by DICGC upto an amount of INR 5,00,000. Unlike mutual funds, investments in an FD scheme fall under the almost-zero risk category as they offer assured returns with negligible risk upto INR 5 lacs per bank.

You can open multiple FD accounts in banks and NBFCs. You also have the flexibility of closing an FD account if you need funds in case of a financial emergency. Many FD schemes allow you to withdraw your investment before the maturity date; however, you will have to pay a penalty.

Some FD schemes (with a tenure of five years) also offer tax deductions on investments up to Rs. 1,50,000 as per Section 80C of the Income Tax Act, 1961. Furthermore, you can avail loans by keeping your FD as collateral and enjoy a lower interest rate.

Fixed Deposits have been an investment option staple to India’s investor demographic for decades. Let’s take a look at what benefits FDs offer that make them an investment pillar:

• Guaranteed Rate of Return: When you commit your funds to a fixed deposit, you secure a predetermined rate of return. This certainty is a significant draw for investors, and many banks provide tools like online interest calculators to forecast potential earnings based on your investment amount and duration.
• Tax-Smart Savings: The interest earned on FDs enjoys a tax threshold. Banks are not required to deduct tax on the interest accrued until it surpasses a specified limit outlined in income tax regulations. This feature is particularly advantageous for small-scale investors.
• Customisable Tenure: FDs offer the flexibility to choose your investment period. While banks set minimum tenure guidelines, the ultimate choice rests with you, the investor. You also have the liberty to renew or extend your FD upon maturity, tailoring it to your financial timeline.
• Simplified Access to Funds:Liquidating your fixed deposit is straightforward. For FDs initiated online, the process can be completed swiftly through Internet banking. Even at physical bank branches, the process is facilitated by simple forms, ensuring that your funds are accessible when needed.

Collateral Benefits: In times of financial need, an FD is a reliable collateral. Most banks permit loans up to 95% of the FD value, making it a dependable resource for securing funds without disrupting your investment's growth.

Fixed Deposits, despite being a staple in the country, come with their downsides. Let's take a look at some of them that are points of concern for investors:

• Taxable Interest: Interest from FDs is taxed under 'Income from Other Sources' at your income slab rate. A TDS of 10% (or 20% without PAN details) further reduces the net returns.
• Lower Returns: FDs typically offer lower returns than other investments, with the rate influenced by factors like bank policies, tenure, and age.
• Inflation Risk: The interest rate on FDs often fails to outpace inflation, potentially leading to diminished purchasing power over time.
• Fixed Interest Rates: The interest rate is locked when creating an FD and does not change, even if market rates increase, possibly resulting in missed opportunities for higher earnings.
• Minimal Liquidity: FDs have limited liquidity, with funds being locked in for a set period. Premature withdrawal and loans against FDs are options, but they have drawbacks like penalties and interest payments.
• Penalty on Premature Withdrawal: Withdrawing an FD early incurs a penalty, typically 1% to 3% of the interest, which can significantly reduce the overall returns, especially for larger deposits or higher rates.

A certificate of Deposit (CD) is a short-term fixed-income investment option. In many cases, CDs are similar to FDs. You invest a lump sum amount for a specific tenure in an authorised bank or financial institution and receive an assured interest amount along with the invested amount upon maturity. However, a CD scheme has its own features and benefits.

CDs are issued in a dematerialised form and they are held with a depository registered with Securities and Exchange Board of India (SEBI). CDs are regulated by the Reserve Bank of India (RBI).

Scheduled commercial banks, small finance banks, regional rural banks, and all India Financial Institutions like SIDBI, Exim Bank, NABARD and NHB can issue CDs. All Indian residents can invest in a CD scheme. The minimum amount of investment in a CD scheme is Rs. 5,00,000, and you can invest only in multiples of Rs. 5,00,000 thereafter.

Investment tenure for CDs generally varies from seven days to one year. CDs with a maturity of 1-3 years can be issued by All-India Financial Institutions.

Certificates of Deposits are another staple investment scheme, and for good reason. Let’s take a look at the benefits you can reap from a CD:

• Flexible Terms and Amounts: Certificates of Deposit provide versatility in duration and investment amount. Whether you prefer short-term commitments or longer ones, CDs cater to varied preferences. Post-maturity, you can renew your CD or start anew, offering continual investment opportunities.
• Assured Safety: Offered by federally insured institutions, CDs come with the assurance of safety, typically insured up to $250,000. This feature significantly reduces investment risk.
• Enhanced Returns Compared to Savings Accounts: Due to restrictions on withdrawals, CDs are often more valuable to financial institutions, leading to higher interest rates for investors compared to traditional savings accounts.
• Diverse Options: The availability of CDs across a spectrum of maturities and terms from various financial institutions enables investors to find options that align perfectly with their individual needs and financial goals.
• Predictable, Fixed Returns: With CDs, you're guaranteed a specific yield at a predetermined time. Even amidst fluctuating broader economic interest rates, your CD maintains a consistent rate, simplifying financial planning and forecasting.

• Limited Liquidity: Accessibility to funds in a CD is not as straightforward as in a savings account. Early withdrawals typically incur penalties, which could be lost interest or a reduction in the principal amount. However, strategies like CD laddering can provide staggered access to funds, somewhat mitigating this issue.
• Inflation Concerns: There's a risk that the interest rates on CDs might not keep pace with inflation. In such scenarios, the purchasing power of your money could diminish over time as the growth in interest fails to outstrip rising inflation rates.

Below are the some crucial differences in the features of fixed deposit and certificate of deposit:

The investment amount and tenure are crucial factors when choosing between an FD and CD. So, you need to consider your financial goals and the amount in hand before investing. If you have a lump sum amount sitting idle in your savings account and have a financial goal to achieve five years down the line, you can choose FD.

However, if you have a short-term financial goal and have enough funds on your hands, you can select a CD. Moreover, you should consider the terms of early withdrawal of your investment in a CD scheme in case you need funds in emergencies. The terms of early withdrawal may vary from one financial institution to another.

Choosing between a fixed deposit and a certificate of deposit is easier when you consider the features of each scheme and the investment you are willing to make. The FD vs CD comparison shows crucial differences in aspects such as the investment tenure and the minimum investment amount.

Choose the most suitable scheme for fixed returns based on your financial goals, investment amount, and features such as the interest rate, loan facility, and premature withdrawal rules. It would be wise to invest in either of these schemes instead of keeping a lump sum amount in a savings bank account.