The issuance of Bank Certificates of Deposit (CDs) increased nearly threefold in FY24 compared to FY22.
About Certificates of Deposit (CDs):
- CDs are negotiable, unsecured money market instruments issued by banks as promissory notes against funds deposited for a maturity period up to one year.
- Scheduled Commercial Banks, Regional Rural Banks, Small Finance Banks, and All-India Financial Institutions issue these.
- The minimum denomination is ₹5 lakh, with further investments made in multiples of ₹5 lakh.
- The tenor ranges from a minimum of 7 days to a maximum of 1 year.
- CDs can also be issued in dematerialised form, meaning electronically.
- Withdrawals before maturity are allowed but often come with penalties.
- Issued under RBI guidelines, they are renewable automatically if the depositor does not decide on the matured funds within a 7-day grace period.
Advantages:
- Safety of principal: The deposited amount is safe, making CDs a less risky option compared to stocks, bonds, or other volatile assets.
- Higher interest rates: CDs typically offer better interest rates than traditional savings accounts, leading to higher returns.
- Grace period: A 7-day grace period is provided to decide whether to reinvest or withdraw the matured funds.
Disadvantages:
- Limited liquidity: Withdrawals before the end of the chosen tenure incur penalties, restricting liquidity.
- Risk of lower returns: If the interest rate is automatically renewed upon maturity, the new rate could be lower than other available investment options.
- Inflation impact: CD interest rates are not tied to inflation, meaning the real value of money could diminish if inflation rises.
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Frequently Asked Question:
What are Certificates of Deposit (CDs)?
CDs are negotiable, unsecured money market instruments issued by banks for a fixed maturity period up to one year.
Who issues Certificates of Deposit?
Scheduled Commercial Banks, Regional Rural Banks, Small Finance Banks, and All-India Financial Institutions issue CDs in India.
Can CDs be withdrawn before maturity?
Yes, CDs can be withdrawn before maturity but often with penalties.
Is the interest on CDs taxable in India?
Yes, interest earned on CDs is taxable under Indian income tax laws.
What is the difference between a CD and a savings account?
CDs offer higher interest rates but have a fixed term, unlike savings accounts which offer more liquidity.