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5 Important FD Facts That Will Help in Compare FD Vs NBFC FD

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5 Important FD Facts That Will Help You Compare Bank FDs with NBFC FDs

Fixed deposits (FDs) have long been one of the most preferred investment options for individuals seeking security and guaranteed returns. However, choosing between bank FDs and NBFC FDs (Non-Banking Financial Company FDs) can be confusing. While both options offer a fixed interest rate and capital safety, there are key differences that investors should consider. Understanding these FD facts will help investors make an informed choice. Additionally, knowledge of joint FD rules is essential for those planning to open fixed deposits with multiple account holders.

This article highlights five crucial FD facts to compare bank FDs with NBFC FDs, their advantages, risks, and rules regarding joint FD accounts.

1. Interest Rates: Which Offers Better Returns?

One of the primary reasons investors choose NBFC FDs over bank FDs is the higher interest rates.

Bank FDs:

  • Public sector banks generally offer lower interest rates, ranging from 5% to 7.5% per annum.
  • Private sector banks offer slightly higher rates, ranging from 6% to 8% per annum.
  • Senior citizens get additional interest rate benefits (typically 0.50% higher).

NBFC FDs:

  • NBFC FDs generally offer higher returns, with interest rates ranging from 7% to 9.5% per annum.
  • Some highly-rated NBFCs provide special schemes with higher returns for long-term deposits.
  • Interest payouts can be chosen as cumulative (compounded) or non-cumulative (periodic interest payments).

Key Takeaway: If higher interest earnings are a priority, NBFC FDs may be a better option, provided the issuer has strong credit ratings.

2. Safety and Risk: Are NBFC FDs Secure?

Safety is a crucial factor when choosing between a bank FD and an NBFC FD.

Bank FDs:

  • All bank deposits (up to Rs. 5 lakh per depositor, per bank) are insured by the Deposit Insurance and Credit Guarantee Corporation (DICGC).
  • Highly regulated by the Reserve Bank of India (RBI), ensuring strict financial compliance.

NBFC FDs:

  • NBFC FDs do not have DICGC insurance, which means deposits are not guaranteed in case of financial distress.
  • Investors must check the credit ratings assigned by agencies like CRISIL, ICRA, or CARE.
  • NBFCs with AAA ratings are considered safe, while those with lower ratings carry more risk.

Key Takeaway: Bank FDs offer higher safety, whereas NBFC FDs provide higher returns with varying degrees of risk.

3. Liquidity and Premature Withdrawal Rules

Liquidity refers to the ability to withdraw funds before maturity without significant losses.

Bank FD Withdrawal Rules:

  • Most banks allow premature withdrawals, but a penalty of 0.5% to 1% is charged on the interest rate.
  • Some banks offer flexi FDs, which allow partial withdrawals without breaking the entire FD.

NBFC FD Withdrawal Rules:

  • Many NBFCs impose stricter withdrawal conditions, especially on non-callable fixed deposits.
  • Premature withdrawal may result in higher penalties or complete disqualification from earning interest.

Key Takeaway: If liquidity is a priority, bank FDs are a better option as they offer more flexible withdrawal terms compared to NBFC FDs.

4. Taxation on Interest Earned from FDs

Understanding the taxation aspect of FD investments is crucial for maximizing returns.

  • Interest earned on both bank and NBFC FDs is taxable under “Income from Other Sources”.
  • Tax Deducted at Source (TDS) is applicable if the total interest exceeds ₹40,000 per year (₹50,000 for senior citizens).
  • Tax-Saving Bank FDs (with a 5-year lock-in) allow deductions of up to ₹1.5 lakh under Section 80C, but NBFC FDs do not provide such tax benefits.

Key Takeaway: While both bank and NBFC FDs attract taxation, tax-saving FDs are available only with banks.

5. Joint FD Rules: Understanding Ownership and Withdrawal

A joint FD account allows two or more individuals to invest together in an FD.

Types of Joint FD Accounts:

  1. Either or Survivor:

o  Either account holder can withdraw the FD amount.

o  Commonly used for hassle-free access in case of the demise of one account holder.

  1. Anyone or Survivor:

o   More than two account holders can operate the account.

o   Any one of the depositors can withdraw before maturity.

  1. Jointly Operated:

o   All account holders must sign for withdrawals and renewals.

o   Ideal for business partners or family members seeking equal control.

Bank FDs vs. NBFC FDs for Joint Accounts:

  • Most banks and NBFCs follow similar rules for joint FDs.
  • Some NBFCs may have stricter documentation requirements for joint holders.
  • Tax liability on interest is shared between joint holders based on contribution.

Key Takeaway: Joint FDs are beneficial for family members, but investors should choose the right operational mode based on financial goals.

Conclusion

Understanding these FD facts can help investors make informed decisions when choosing between bank and NBFC FDs. While NBFC FDs offer higher interest rates, they come with higher risk and lower liquidity. On the other hand, bank FDs provide better safety, liquidity, and tax-saving options. Additionally, knowing joint FD rules is essential for those investing with family members. Ultimately, investors should assess their financial goals, risk appetite, and liquidity needs before selecting the best FD option that aligns with their investment strategy.

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