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Should You Invest in a Certificate of Deposit? A Beginner’s Guide

By: Akriti Tomar | Date : Mar 28, 25

Should You Invest in a Certificate of Deposit? A Beginner’s Guide

Disclaimer: Investments in the securities market are subject to market risks. This content is for educational purposes only and does not constitute financial advice. A Certificate of Deposit (CD) is a fixed-income financial instrument governed by the Reserve Bank of India (RBI) and issued in a dematerialized form. It represents an agreement between depositors and banks, where the bank pays interest on the investment. A CD is a short-term investment with fixed amounts and maturity periods ranging from 1 to 3 years. Below are the key features and the process to purchase a Certificate of Deposit.

Features of Certificate of Deposit

Here are some key characteristics of CDs and how they compare to other financial instruments:
  • The minimum deposit amount for a CD in India is Rs. 1 lakh, and further investments must be in multiples of this amount.
  • CDs are issued by Scheduled Commercial Banks (SCBs) and All-India Financial Institutions. However, Cooperative Banks and Regional Rural Banks (RRBs) are not eligible to issue CDs.
  • CDs issued by SCBs have a tenure ranging from 3 months to 1 year, whereas CDs issued by financial institutions have a tenure of 1 to 3 years.
  • CDs in dematerialized form can be transferred through endorsement or delivery, similar to dematerialized securities.
  • There is no lock-in period for a Certificate of Deposit.

Certificate of Deposit - Key Highlights

 
Attribute Details
Definition A CD is a financial product offered by banks and credit unions that provides an interest rate premium in exchange for a fixed-term deposit.
Interest Rates CD interest rates are fixed, providing predictable returns. The bank cannot change the rate during the tenure, ensuring a guaranteed return.
Minimum Deposit Rs. 1,00,000
Tenure Typically ranges from 3 months to 3 years, depending on the issuer. The funds become accessible without penalty upon maturity.
Eligibility Issued by SCBs and selected financial institutions as per RBI regulations. Available to individuals, corporations, companies, and funds. CDs can also be issued to NRIs but only on a non-repatriable basis.
Taxation Fully taxable under the Income Tax Act.
Loans Against CDs Generally, banks do not provide loans against CDs unless explicitly permitted by the RBI. Issuers may repurchase CDs before maturity at prevailing market rates. Investors can choose to accept or reject the buyback offer.
 

How to Buy a Certificate of Deposit?

The process of buying and selling CDs is similar to that of shares. Here are the steps:
  1. The buyer and seller agree on the price and quantity of the transaction.
  2. The seller authorizes its depository participant through a delivery instruction slip.
  3. The slip includes instructions to debit the seller's account and transfer the CD to the buyer's account.
  4. In case of any confusion, professional assistance can be sought.

Benefits of Investing in a Certificate of Deposit

  • CDs are secure financial instruments that are not subject to market volatility, ensuring predictable returns at maturity.
  • They offer higher interest rates on lump sum investments compared to traditional savings accounts.
  • Investors can choose between monthly, annual, or lump sum payouts at maturity, tailoring the investment to their financial needs.
  • CDs generally do not have additional costs or fees beyond the initial deposit.

Certificate of Deposit vs. Fixed Deposit

 
Criteria Fixed Deposit (FD) Certificate of Deposit (CD)
Minimum Investment Rs. 1,000 Rs. 1,00,000
Returns 3.5% - 8% Generally higher if issued by organizations compared to commercial banks
Tenure Up to 10 years 1 to 3 years
Collateral Loans can be availed against FD Loans against CDs are generally not allowed
 

FAQs on Certificate of Deposit

Q1. Can funds be transferred between an online CD and other bank accounts? Yes. During the grace period, you can transfer funds between your online CD and other accounts. Investors are given a specified period to make a one-time deposit, withdrawal, or renewal of their online CD. Q2. Can I withdraw funds from my online CD? Yes, you can withdraw funds during the grace period without any penalty. However, an early withdrawal before maturity may attract penalties. Q3. Does my online CD automatically renew upon maturity?  After a CD matures, investors have a grace period to withdraw or transfer funds. Some banks may automatically renew CDs at prevailing interest rates. Q4. What happens when a CD matures? After maturity, investors can either withdraw their funds or reinvest them in a new CD. Banks and financial institutions may automatically renew CDs unless instructed otherwise. Q5. Who issues Certificates of Deposit? CDs are issued by Scheduled Commercial Banks (excluding Regional Rural Banks and Local Area Banks) and All-India Financial Institutions permitted by the RBI. Kickstart Your Investment Journey with RMoney by opening your Demat Account  today and take the first step toward smarter investing and trading! Raghunandan Money Demat account is your gateway to a safe, secure, and hassle-free & customer friendly services for investing in various investment products like shares, mutual funds, IPOs, bonds, NCDs including the certificate of deposits. You can read about our depository services before signing up with us on the same page.  Just leave your name, mobile number and email, our representative will connect with you. Even you can comment in the comment section of this blog article. You can discuss in details about your plan for short duration investment planning, including investing in a certificate of deposit.   Need Help?  Contact RMoney:  

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