Deposit Certificates

It is an agreement between the depositor and the authorized financial institution to hold a fixed amount of money for a fixed period in exchange of the issuing bank paying the interest. CDs or Deposit Certificates are a safer and more conservative investment than stocks and bonds. With low opportunity but a non-volatile guaranteed rate of return. It is a fixed-income financial instrument governed by the RBI where the amount at withdrawal is assured from the beginning. A CD can be issued by any All-India Financial Institution or Scheduled Commercial Bank. They are issued at a discount provided on face value. Like a fixed deposit (FD), a CD’s purpose is to denote in writing that you have deposited money in a bank for a fixed period and that bank will pay you interest on it based on the amount and duration of your deposit.

Difference Between CD vs FD

There is no major difference between a certificate of deposit and a fixed deposit. They are one and the same. Fixed deposits are even referred to as CDs or time deposits by certain banks. They come with the same term period, a minimum requirement for a deposit, and high-interest rates compared to traditional savings accounts. One difference is that CDs are freely negotiable while FDs are not.

Difference between CD vs Commercial Paper

There are two glaring differences between commercial paper and a CD. The first is who can issue them. A CD is issued by financial institutions and banks. Commercial papers are issued by primary dealers, large corporations and All-India Financial Institutions. The second difference is the minimum amount of deposit. A certificate of deposit requires a minimum investment of ₹1 lakh and thereafter permits multiples of it. A commercial paper, on the other hand, is issued for investments of at least ₹5 lakhs and in multiples of ₹5 lakh, thereafter.

Some of the pros of opening a CD:

• Offers a higher rate than you can earn with a savings or money market account

• It pays a guaranteed, rate of return, avoiding the volatility and losses that are possible with stocks and bonds

• It can help fend off spending temptations since withdrawing the funds early triggers a penalty

Similarly, there were a few cons too:

• It cannot be liquidated before maturity without incurring an early withdrawal penalty.

• During maturity, it earns less compared to stocks and bonds.

• It earns a fixed rate of return regardless of the rise of interest rates during the tenure.

Features of CD

CDs can be issued in India for a minimum deposit of ₹1 lakh and in subsequent multiples of it.

Scheduled Commercial Banks (SCBs) and All-India Financial Institutions are eligible to issue a CD. Cooperative Banks and RRBs cannot issue a CD.

CDs issued by SCBs have in term period anywhere between 3 months to a year.

CDs issued by financial institutions have a term period ranging from 1–3 years.

Similar to dematerialized securities, CDs in dematerialized forms are transferable through means of endorsement or delivery.

There is no lock-in required for a CD.

One cannot issue a loan against a CD.

A certificate of deposit is fully taxable under the Income Tax Act.

A CD cannot be publicly traded.

Banks are not permitted to buy back a CD before its maturity.