Certificate of Deposit

A Certificate of Deposit (CD) is issued by the Reserve Bank of India (RBI) in a dematerialised form, providing the unitholders with a fixed income. These work as digitally signed agreements between the banks and the investors where the CD provider guarantees a fixed interest. Generally, a Certificate of Deposit is ideal to save for short-term goals and they come with a maturity period of 1-3 years.

Understanding Key Highlights of Certificate of Deposit

In the table below, you will find some key attributes of a Certificate of Deposit:

What is a Certificate of Deposit in India?	A CD is a financial instrument that customers can purchase from different authorised credit unions and banks. In return, they must keep a certain amount invested for an agreed-upon period of time.
Certificate of Deposit Interest Rates	You can get a precise idea of the return on investment from the locked rates, which are key attributes of CDs. During the tenure, this locked rate remains unchanged which assures a guaranteed return.
Certificate of Deposit Minimum Amount	The minimum deposit amount has been set as ₹1,00,000.
Investment Term	It can range from 6 months to up to some years. After your investment reaches maturity, you can withdraw your principal along with the interest earned without worrying about any penalties.
Taxes	Income tax is levied on your earnings from a CD as per the normal tax slab rate.
Opportunity for Secured Loans	CD holders can borrow against their CDs, except when the RBI says they cannot. Later, the issuer can purchase back the issued CDs before the maturity period at the current market rate. On the other hand, investors can either reject or accept this buying back if they want.
Eligibility Criteria to Issue Certificate of Deposit	Only some scheduled commercial banks and specific financial institutions can issue CDs within the limit specified by the RBI.
	Corporations, companies and individuals can invest in a Certificate of Deposit. At times the RBI issues deposits to NRIs, but on a non-repatriable ground.
	Banks cannot use CDs as collateral for loans, and they cannot buy back their own CDs early. Usually, this is the rule, but sometimes, the RBI may loosen these rules for a short period. Remember, though, banks still have to keep a certain amount of liquid assets (SLR and CRR) even when they issue CDs.

Features of Certificate of Deposit

If you are looking for some salient features of a CD that can help you compare them with other investment instruments, here we have listed down the details:

In India, a Certificate of Deposit requires a minimum deposit of ₹1 lakh or in multiples thereof.
Only the Scheduled Commercial Banks (SCBs) and All-India Financial Institutions have the right to issue a Certificate of Deposit. Thus, no Regional Rural Banks (RRBs) or Cooperative Banks can issue these instruments.
A Certificate of Deposit issued by SCBs typically has a tenure of 3 to 12 months. On the other hand, an authorised financial institution-issued CD features a term period of 1 to 3 years.
As CDs are quite similar to other dematerialised securities, you may transfer them easily through delivery or endorsements.
CDs do not come with a fixed lock-in period.
Beneficiaries can claim tax deductions on their contributions made towards a CD. The TDS applies if your income comes under the prevalent tax slab rates.

When Do Banks Offer CD Investment Options in India?

Certain situations make banks more likely to issue Certificate of Deposit. The arrival of these situations hinges mainly on the following two factors:

When the bank faces a considerably high demand for credit or they are experiencing low growth in terms of deposits
When the overall market is dealing with tight liquidity conditions and a significant capital of the bank is tied to non-liquid assets

Note: NRIs who have contributed to a Certificate of Deposit are not allowed to repatriate after their investments have matured.

Pros and Cons of Investing in a Certificate of Deposit

Investment in a Certificate of Deposit offers a mix of benefits and drawbacks. Let us begin by exploring the advantages of investing in CDs.

When investing in some CDs, you can enjoy a greater Annual Percentage Yield (APY) than a regular savings bank account.
These instruments are ideal for growing the habit of disciplined savings as they limit your access to funds for a certain time.
Financial planning becomes easy as you keep aside your savings to meet future needs.
You achieve peace of mind as CDs guarantee a stable rate of returns.
Your principal amount is preserved throughout the tenure of this investment.

Now that we are aware of the advantages, let us take a closer look at the cons:

CDs lock in your money for varying periods, thus limiting the scope for liquidity.
You may have to bear penalties if you wish to withdraw your invested amount before maturity.
Inflation can have an adverse impact on the estimated yield of the CD.