Certificate of Deposit

What is a certificate of deposit?

A certificate of deposit is a negotiable money market instrument issued in dematerialised or promissory note form by regulated banks and financial institutions. When an investor purchases a CD, they essentially place funds with the issuer for a fixed tenure at a predetermined interest rate. The amount, along with interest, is repaid in full at maturity.

A CD account simply represents one’s holdings in certificates of deposit, usually maintained in a demat account. It is not like a savings account and does not provide premature withdrawal facilities. This fixed structure ensures clarity on returns, making CDs suitable for risk-averse investors who prefer certainty over flexibility.

Key characteristics

Most banks today issue CDs in dematerialised mode due to the efficiency and convenience of electronic settlement.

How does a certificate of deposit work?

Understanding how a certificate of deposit works is essential before making any CD investment. The lifecycle involves three core stages: issuance, holding and maturity.

1. Issuance

When an investor decides to park surplus funds for a fixed period, the bank issues a certificate of deposit. The bank effectively borrows this amount and agrees to pay a fixed interest rate.

2. Holding period

During the tenure, interest accrues at the rate fixed at issuance. CDs cannot be redeemed prematurely with the issuer. However, dematerialised CDs may be traded in the secondary market if liquidity is available.

3. Maturity and payout

At maturity, the principal and accrued interest are paid to the investor. CDs are unaffected by changes in market interest rates after purchase, ensuring predictable returns.

Key features of certificates of deposit
Certificates of deposit offer several useful features:

• Safety: Issued by regulated entities governed by the Reserve Bank of India.
• Fixed tenure: The duration is locked in, ensuring predictability.
• Negotiability: Dematerialised CDs can be traded in the secondary market.
  Non-redeemable: Early withdrawal is not allowed with the issuing institution.
• No add-ons: CDs do not offer reinvestment or overdraft facilities.

These features position CDs as reliable short-term financial instruments.

Types of certificates of deposit

1. Bank-issued CDs
Scheduled commercial banks (excluding regional rural banks and co-operative banks) issue CDs to individuals, corporates, trusts and eligible investors.

2. Financial institution CDs
Certain All-India Financial Institutions such as SIDBI, NABARD and IFCI issue CDs, largely targeting institutional investors with longer tenures.

3. Dematerialised CDs
Now the most common mode, issued through NSDL or CDSL.

4. Promissory note CDs
Physical CDs issued as promissory notes; usage has declined with digital adoption.

Advantages of investing in a certificate of deposit

• Assured returns with a fixed interest rate.
• Low risk, given the regulated issuers.
• Secondary market liquidity for dematerialised CDs.
• Portfolio diversification within fixed income.
• Ideal for short-term cash deployment, especially for institutions.

Risks and limitations of certificates of deposit

• Interest rate risk if market rates rise.
• Limited liquidity in the secondary market at times.
• Taxable returns, taxed as per slab rates.
• No premature withdrawal with the issuer.
• Inflation risk, as fixed returns may lag rising prices.

Certificate of deposit vs fixed deposit

Certificate of deposit vs other fixed-income instruments

Eligibility and issuance process

Eligibility
CDs may be issued to resident individuals, NRIs on a non-repatriable basis, corporates, trusts, funds and institutions.

Issuance process

• The issuer decides the interest rate and tenure.
• CDs are issued in dematerialised or physical form.
• Investors apply through banks or authorised intermediaries.
  CDs are credited to the investor’s demat account.
  Secondary market trading may occur later.

How to invest in a certificate of deposit in India

• Select the issuer (bank or financial institution).
• Apply through a bank or registered dealer.
• Choose dematerialised mode for convenience.
• Invest a minimum of ₹1 lakh.
  Explore NSE or BSE’s wholesale debt segment for secondary market options.

Taxation of certificate of deposit returns

Interest from CDs is taxed under Income from Other Sources and is subject to slab-rate taxation. TDS may apply based on the investor category. For CDs sold in the secondary market, capital gains provisions may apply, so maintaining proper transaction records is essential.

Best practices before investing in a certificate of deposit

• Check the creditworthiness of the issuer.
• Compare interest rates across banks.
• Align the tenure with liquidity needs.
• Assess likely secondary market liquidity.
• Consider post-tax returns to estimate effective yield.

Who should invest in a certificate of deposit?

• Institutional investors managing short-term surpluses.
• Corporates seeking predictable returns.
• High-net-worth individuals prioritising security.
• Conservative investors diversifying fixed-income exposure.

Certificates of deposit play a vital role in India’s fixed-income ecosystem. They offer a blend of safety, fixed returns and regulatory oversight. For investors who value capital preservation and predictable earnings, a certificate of deposit can be a prudent addition to a diversified portfolio. Its structured design provides stability in an uncertain market environment, making CD investments a dependable option for short-term financial planning.

Conclusion

Certificates of deposit occupy an important position within India’s fixed-income ecosystem. They provide an effective balance of safety, fixed returns and regulatory oversight. For investors who value capital preservation, disciplined financial planning and clarity of income, a certificate of deposit can be a prudent choice. Its structure supports stability in an uncertain environment, making CD investments a reliable anchor within diversified portfolios.