FIXED DEPOSIT
A fixed deposit (FD) or a Term Deposit, is an amount kept with a bank or financial institution for a fixed tenure. As a part of agreement, the bank or financial institution pays a fixed interest towards the amount deposited. The interest rate is higher than a regular savings account, but lower when compared to other investment tools like Mutual Funds or Equities.
Fixed Deposits offered by companies are known as Company Deposits or Corporate Deposits. They are one of the many money raising tools for the companies. Under these, Companies raise money from the public and offer them a fixed rate of interest for different tenures. The amount of money which can be raised is decided by the approving authorities, like the Reserve Bank of India (RBI).
Other General Features:
- These have periodic interest payment option (Monthly, Quarterly, Semi Annually, Annually) and Cumulative option (compounded and paid at maturity) specific to the deposit.
- These come with different tenures from 1year to 5 years.
- Issues are rated by Independent Rating agencies like CARE, CRISIL, ICRA etc.
Bonds
A bond is a form of loan, typically used by corporates or government to raise capital. Bonds come with fixed investment tenure, which means, an investor subscribes to bonds (or gives money to bond issuer) for a fixed period of time at variable or fixed rate of interest. Bond is also known as fixed-income security.
Like stocks even bonds can be traded on relevant platforms, but what makes it different from each other is that when invest in a company’s stock you are shareholder (i.e., they are fractional owners) of that company, however bondholders have a creditor stake in the company (i.e., they are lenders). Also, as bonds come with a fixed tenure, they are redeemed at maturity, whereas stocks may be outstanding indefinitely.
Types of Bonds
- Non-Convertible Debentures (NCDs)
Non-Convertible Debentures (NCDs) are unsecured bonds, which are not protected by a physical asset or collateral. There are some debentures which can be exchanged for company equity or stock, but NCDs are debentures without the convertibility feature attached to them. As a result, they usually come with higher interest rates than convertible debentures.
- CONVERTIBLE BONDS
A convertible bond is a type of debt security that can be converted into equity shares during the bond's life, usually at the decision of the bondholder. It carries lesser interest when compared to NCD.
- Tax Free Bonds
As the name suggests, the interest earned from Tax Free Bonds is not taxed. However, there is no deduction for the investment amount in these bonds. As these bonds eventually gets listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE), the bondholders can have an option of selling them before the bond’s maturity. However, the price you may get for selling before their full term will depend on market conditions.
- Capital Gains Bonds (54EC)
Capital gains bonds are investment tools, issued by specified institutions, meant to avail tax benefit on long term capital gains. Under Section 54EC of Income Tax Act, any long-term capital gains arising from transfer of any capital asset would be exempted from tax if:
- The entire capital gain realized is invested within 6 months of the date of transfer in eligible bond
- If the capital gain invested in bonds is held for 5 years
- Maximum investment limit of up to Rs.50 Lakhs in a Financial Year per individual.
- The bonds so acquired is not transferred or converted into money or any loan or advance is not taken on security of such bond within 3 years from date of acquisition
- The interest rate of the Bonds is 5.75% pa, w.e.f. 02.04.2018
However, if the amount invested in bonds is less than the capital gains realized, only proportionate capital gains would be exempt from tax.
Companies offering Capital Gain Bonds are the National Highway Authority of India (NHAI), Rural Electrification Corporation (REC) and Power Finance Corporation (PFC).
- 7.75% GOI SAVINGS (TAXABLE) BONDS
These are similar to any other bond issued by the government with fixed rate of interest. In case of these bonds, the interest rate is fixed at 8% per annum which can be either paid half yearly, or the investor can opt for cumulative payment of interest at its maturity. investors can buy these bonds from State Bank of India and other nationalized banks. The bonds can also be bought from private sector banks like HDFC Bank Ltd and ICICI Bank Ltd and offices of Stock Holding Corporation of India. They are available in physical form only and are not listed or tradable on stock exchanges. While there is no maximum limit of investment in these bonds, the minimum amount you can invest is Rs. 1,000/- (face value of one bond). The interest gained out of these bonds is taxable at a marginal rate. Tax is deducted at source if your total interest exceeds Rs. 10,000/-.
Features
Facility of premature encashment of these bonds to individual investors in the age group of sixty years and above, after a minimum lock-in period of three years from the date of issue as indicated below:
- Lock-in period for investors in the age bracket of 60 to 70 years shall be 5 years from the date of issue.
- Lock-in period for investors in the age bracket of 70 to 80 years shall be 4 years from the date of issue.
- Lock-in period for investors of the age of 80 years and above shall be 3 years from the date of issue.
In case of joint holders or more than two holders of Bond any one of the holders shall fulfill the above conditions of eligibility. After aforesaid minimum lock in period from the date of issue an eligible investor can surrender the Bonds at any time after the 10th, 8th and 6th half year corresponding to the respective lock in period but redemption payment will be made on the following interest payment due date. Thus the effective date of premature encashment for eligible investors will be 1st October and 1st April every year. However, 50% of interest due and payable for the last six months of the holding period will be recovered in such cases both in respect of cumulative and non-cumulative bonds.
SELF ATTESTED DOCUMENTS REQUIRED
- FOR INDIVIDUAL:
- PAN copy
- Address Proof (all the holders)
- Cancelled cheque
- FOR HUF:
- PAN copy of HUF
- Address Proof – Bank statement
- PAN copy & Address proof of Karta
- Cancelled cheque