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 attest to the importance of this financial tool in a well-rounded investment portfolio. Having studied the intricacies of various financial instruments and their regulatory frameworks, I can provide a comprehensive overview of the key concepts mentioned in the article about Certificates of Deposit.
Certificates of Deposit (CDs): An In-Depth Analysis
1. Introduction to Certificates of Deposit: Certificates of Deposit, or CDs, are fixed-income financial instruments regulated by the Reserve Bank of India (RBI). I have firsthand knowledge of the regulatory landscape and the dematerialized form in which CDs are issued.
2. Features of Certificate of Deposit:
- CDs in India can be issued for a minimum deposit of Rs. 1 lakh or subsequent multiples.
- Issued by Scheduled Commercial Banks (SCBs) and All-India Financial Institutions, excluding Cooperative Banks and Regional Rural Banks (RRBs).
- Term periods range from 3 months to 1 year for SCBs and 1 year to 3 years for financial institutions.
- Transferable in dematerialized form through endorsem*nt or delivery.
- No lock-in period; fully taxable under the Income Tax Act.
3. Key Highlights of Certificate of Deposit:
- CD is a product offered by banks and credit unions with an interest rate premium for a locked-in period.
- Locked interest rates provide a predictable return over the investment period.
4. Certificate of Deposit - Key Attributes:
- Minimum deposit amount starts at Rs. 1,00,000.
- Tenure varies, and upon maturity, funds can be withdrawn without penalty.
- Eligible for individuals, corporations, companies, and funds, including non-repatriable issuance to NRIs.
5. Taxes and Loans:
- CDs are fully taxable under the Income Tax Act.
- Banks and financial institutions cannot provide loans against CDs. RBI may relax norms temporarily.
6. Buying and Selling Process:
- Similar to buying and selling shares.
- Agreement on price and transaction quality.
- Authorization through depository participants.
- Debit seller's account and transfer CD to the buyer's account.
7. Benefits of Issuing a Certificate of Deposit:
- Capital-efficient, secure financial instrument with assured amounts at maturity.
- Offers higher interest rates on lump sum investments.
- Flexible payout options: monthly, annual, or lump sum at maturity.
8. Certificate of Deposit vs. Fixed Deposit:
- Comparative analysis with Fixed Deposit (FD) in terms of investment amount, tenure, and returns.
- CD usually requires a higher minimum investment but offers shorter tenure with potentially higher interest rates.
My expertise in financial instruments allows me to explain the nuances of Certificate of Deposit effectively, covering aspects like taxation, eligibility criteria, and the buying/selling process.
