Tax Implications of Investing in Corporate Fixed Deposits Schemes

Corporate FD schemes are a popular investment choice for individuals seeking higher interest rates compared to traditional bank FDs. These deposits, offered by non-banking financial companies (NBFCs) and corporations, provide a fixed return over a specific period. While they offer attractive interest rates, investors must understand the tax implications associated with these investments. Tax liabilities on interest earnings, tax deduction at source (TDS), and potential exemptions can significantly impact the overall returns.

In this blog, we will explore the tax implications of investing in corporate fixed deposits, including how the interest is taxed, TDS rules, ways to reduce tax liability, and whether these investments are suitable for different investor profiles.

Understanding the Taxation of Corporate Fixed Deposits

Interest earned from corporate FDs is fully taxable under the investor’s income tax slab. Unlike some other investment options, corporate FD interest is considered ‘Income from Other Sources’ and must be reported while filing income tax returns (ITR). The taxation structure is as follows:

• If an investor falls under the 5% tax slab, they will have to pay 5% tax on their interest income.
• For those in the 20% or 30% tax brackets, the tax liability on interest increases accordingly.
• Senior citizens (above 60 years) enjoy a higher exemption limit on income, but the interest earned on corporate FDs is still fully taxable.
• Non-resident Indians (NRIs) investing in corporate FDs in India also face taxation under specific rules.

Unlike tax-saving FDs offered by banks, corporate FDs do not offer any tax benefits under Section 80C of the Income Tax Act. Therefore, they are not ideal for investors looking for tax-saving options.

Tax Deducted at Source (TDS) on Corporate FDs

TDS applies to corporate fixed deposits when the total interest earned exceeds a specific threshold in a financial year. The key points to consider are:

• TDS Rate: The standard TDS rate is 10% if the investor provides their PAN details. If the PAN is not provided, the TDS rate increases to 20%.
• Threshold Limit: TDS is deducted only if the interest earned exceeds ₹5,000 per year.
• TDS Exemption: If an individual’s total income is below the taxable limit, they can submit Form 15G (for individuals below 60) or Form 15H (for senior citizens) to the company to avoid TDS deduction.
• NRIs and TDS: Non-resident Indians investing in corporate FDs are subject to a higher TDS rate of 30% plus applicable surcharge and cess. They may claim relief under Double Taxation Avoidance Agreements (DTAA) if applicable.

How to Reduce Tax Liability on Corporate FD Interest?

Investors can explore a few strategies for the best investment fund to minimize their tax liability earnings:

1. Splitting Investments – Instead of investing a lump sum in one FD, spreading the investment across multiple financial years can help in keeping interest earnings below the TDS threshold.
2. Investing in the Name of Family Members – Investors can consider opening FDs in the name of their spouse or children (who may have lower or no taxable income) to reduce tax liability.
3. Using Tax-Exempt Investment Options – Investing part of the corpus in tax-saving instruments like the Public Provident Fund (PPF) or tax-free bonds can help offset the taxable interest income.
4. Utilizing Deductions – Under Section 80TTB, senior citizens can claim a deduction of up to ₹50,000 on total interest income from deposits, including corporate FDs.
5. Opting for Cumulative FDs – Investors choosing cumulative corporate FDs (where interest is paid at maturity rather than annually) may delay tax liability, potentially reducing their taxable income in a given financial year.
6. Investing in Tax-Free Bonds – Investors in higher tax brackets can consider moving a portion of their investments to tax-free bonds, which provide interest that is exempt from taxation.

Who Should Invest in Corporate Deposits?

Experts at Gravitas Investments suggest that corporate FDs are best suited for investors who:

• Are in a lower tax bracket and want to earn higher interest compared to bank FDs.
• Are senior citizens who can utilize the ₹50,000 deduction under Section 80TTB
• Do not need liquidity and can lock in funds for a fixed tenure.
• Prefer fixed-income instruments over market-linked investments like stocks or mutual funds.
• Are NRIs looking for investment options in India but willing to account for higher taxation

However, high-income investors should consider diversifying into other tax-efficient instruments to optimize their returns.

Risks Associated with Corporate FD

While corporate FDs offer high interest rates, they come with certain risks that investors must be aware of:

• Credit Risk: Unlike bank FDs, corporate FDs are not insured by Deposit Insurance and Credit Guarantee Corporation (DICGC), meaning there is a risk of default.
• Liquidity Risk: Premature withdrawals may come with penalties, reducing overall returns.
• Interest Rate Risk: In a rising interest rate environment, investors may miss out on higher returns offered by newer FDs.
• Taxation Risk: The lack of tax-saving benefits makes them less attractive for those in higher tax brackets.

Wrapping Up

Corporate fixed deposits can be a lucrative investment option, offering attractive returns compared to traditional bank FDs. However, understanding the tax implications is crucial for optimizing net returns. Interest earned from corporate FDs is fully taxable, and TDS is deducted if earnings cross a certain threshold. By strategically planning investments, submitting necessary tax exemption forms, and considering alternative investment options, investors can manage their tax burden effectively.

For expert financial guidance on corporate FD investments and tax-saving strategies, visit Gravitas Investments and make informed investment decisions today.