A certificate of deposit (CD) is a popular investment vehicle intended to provide returns on the amount invested for a fixed term. Governed by the Reserve Bank of India (RBI), investors can buy the CD from financial institutions as well as different commercial banks. Working similarly to Fixed Deposit (FD), a certificate of deposit gives an underwriting that the deposited amount will get repaid to depositors with interest on completion of the term.
What is a Certificate of Deposit?
Certificate of deposit (CD) is basically a fixed-income financial tool issued in dematerialised form and administered by the RBI. It is a savings account, which holds a certain amount of funds for a fixed period, like 6 months, 1 year, or 5 years, and in exchange, the issuing financial institution pays interest.
When an individual redeems his/her respective CD, they will receive the originally invested money along with accumulated interest. The certificates of deposit are considered one of the safest options for savings. In this product, the amount of withdrawal remains guaranteed right from the beginning.
In India, CDs are provided at a discount at face value. Just like a fixed deposit certificate, a certificate of deposit (CD) exhibits in writing that the investor has deposited money in their account for a fixed period. Based on the amount and tenure of deposit, the financial institution returns the deposited sum plus interest.
Attributes of Certificate of Deposit
Certificate of Deposit Definition |
The product that banks and credit unions offer that offers an interest rate premium in exchange for the customer's agreement to lock in a sum for a defined length of time is known as a certificate of Deposit. |
Certificate of Deposit Interest Rates |
The advantages of CDs are their locked rates, which will give the deposit a clear and predictable return over time. It is a guaranteed return because the bank won't modify the rate, not even later. |
Certificate of Deposit Minimum Amount |
With a few exceptions, you can decide on a principal amount before opening the CD. The smallest deposit amount is Rs. 100,000. |
Certificate of Deposit Tenure |
This is the duration of the CD; it may range from six months to many years. The tenure ends on the maturity date; after the CD has fully matured, you can withdraw the money without incurring any penalties. |
Eligibility Criteria |
Within the limits set by the RBI, CDs are issued by scheduled commercial banks and specified financial institutions in the country. Individuals, corporations, companies, and funds, among others, receive Certificates of Deposit. NRIs might also be issued Certificates of Deposit, but only on a non-repatriable basis. It is critical to know that banks and financial organisations cannot make loans secured by CDs. Banks would also not purchase their own CDs before the maturity date. The RBI will relax the aforementioned rules for a set length of time. It is critical to note that banks must adhere to the statutory liquidity ratio and cash reserve ratio when calculating the price of a Certificate of Deposit. |
Taxes |
Certificates of deposits are completely fully taxable in the hands of investors under the Income Tax Act. |
Opportunity for Loans |
Except if expressly prohibited by the RBI, a depositor can obtain loans against CDs. The issuer is required to purchase back CDs prior to maturity at the current market price. Investors could accept or reject the CDs purchased back offer based on their preferences. |
