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
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Certificate of Deposit (CD)
A Certificate of Deposit (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 depositors and banks, wherein the bank pays an interest on the investment made by the depositor.
Features of Certificate of Deposit
Here are some important features of Certificate of Deposits in India:
- Minimum deposit: CDs can be issued for a minimum deposit of Rs. 1 lakh or in subsequent multiples of it.
- Issuers: Certificates of deposit are issued by Scheduled Commercial Banks (SCBs) and All-India Financial Institutions. Cooperative Banks and Regional Rural Banks (RRBs) are not eligible for issuing CDs.
- Term period: The term period for CDs issued by SCBs ranges from 3 months to 1 year, while for CDs issued by financial institutions, it ranges from 1 year to 3 years.
- Transferability: CDs in dematerialized form can be transferred through endorsem*nt or delivery, similar to dematerialized securities.
- Lock-in period: There is no lock-in period for a certificate of deposit.
- Taxation: CDs are fully taxable under the Income Tax Act.
How to Buy a Certificate of Deposit?
The process of buying and selling CDs is similar to that of buying and selling shares. The steps involved are as follows:
- The seller and the buyer need to agree on the price and the quality of the transaction.
- The seller will authorize its depository participants through the delivery instructions slip.
- The slip will include instructions to debit the seller's account and transfer the CD to the buyer's account.
- In case of any confusion, professional assistance can be sought.
Benefits of Issuing a Certificate of Deposit in India
The advantages of issuing a certificate of deposit in India are as follows:
- Capital preservation: CDs do not consume capital for market volatility and provide assured amounts at the time of maturity. The deposited money continues to predict an increase.
- Higher interest rates: CDs offer larger interest rates on lump sum investments compared to other financial instruments.
- Flexible payouts: CDs offer options for monthly payouts, annual payouts, or lump sum payouts during withdrawal at maturity. The tenure and price of investment can be tailored to individual needs within certain parameters set by the bank.
Certificate of Deposit vs Fixed Deposit
Here is a comparative analysis of Certificate of Deposit and Fixed Deposit:
- Minimum investment amount: The minimum investment amount for a fixed deposit is Rs. 1000, while for a CD, it is Rs. 1 lakh.
- Return on investment: Fixed deposits offer returns ranging from 3.5% to 8%, while CDs, if issued by organizations, have higher interest rates compared to commercial banks.
- Investment tenure: Fixed deposits are long-term investments with a maximum maturity period of 10 years, while CDs are short-term investments with a maturity period ranging from 1-3 years.
- Collateral and loans: One can apply for a loan against a fixed deposit, but not against a CD. Additionally, banks would not buy their own CDs before maturity.
Please note that the information provided above is based on the search results and may not be exhaustive. If you have any further questions or need clarification on any specific aspect, feel free to ask!
