Corporate Bond vs Fixed Deposit Returns

Understanding Fixed Deposits and Corporate Bonds

When it comes to stable income and capital protection, most Indian investors naturally think of fixed deposits (FDs). However, with the evolution of the Indian bond market and improved accessibility through regulated online platforms, corporate bonds are now gaining attention as an alternative source of fixed income.

This article explains the key differences between corporate bonds and fixed deposits, focusing on returns, risk, liquidity, and taxation — helping investors understand how each instrument fits within their financial goals.

Fixed Deposits (FDs):

A fixed deposit is a savings instrument offered by banks and non-banking financial companies (NBFCs). Investors deposit a lump sum for a fixed tenure and earn a pre-determined interest rate. The return is predictable, making it one of India’s most preferred investment options.

Corporate Bonds:

Corporate bonds are debt instruments issued by companies to raise funds from investors. In exchange, the company promises to pay interest (called a coupon) at regular intervals and return the principal amount at maturity. These are listed and traded in the bond market, offering transparency and market-driven yields.

Returns Comparison: Bond vs FD – Which Is Better?

The return potential is one of the most significant factors distinguishing bonds vs FDs.

• Corporate Bonds: The yield depends on the issuer’s credit rating and prevailing market interest rates. Higher-rated bonds (AAA/AA) generally offer moderate returns with lower risk, while lower-rated bonds may offer higher yields but carry greater credit risk.

• Fixed Deposits: FD interest rates are fixed and do not fluctuate with the market. For example, as of recent years, large banks offer around 6.5% to 7.5%, while corporate bonds of similar tenures may offer 7.5% to 9%, depending on the issuer’s rating.

However, while corporate bonds can offer higher returns, investors must account for credit quality and market risks, which are relatively lower in FDs.

Understanding the Risk Factor

Fixed Deposits are often viewed as safer since deposits with banks are covered under the Deposit Insurance and Credit Guarantee Corporation (DICGC) scheme up to ₹5 lakh per depositor per bank.

Corporate Bonds, on the other hand, carry credit risk, i.e., the risk of default by the issuer. This is mitigated by investing in highly rated bonds (AAA/AA) or bonds of reputed companies.

Moreover, bond investors face interest rate risk, where bond prices fluctuate inversely with market interest rates.

Liquidity and Accessibility

• Corporate Bonds:

Listed corporate bonds can be bought or sold on exchanges through SEBI-registered Online Bond Platform Providers (OBPPs) like BondScanner, ensuring transparency and secure settlement.

• Fixed Deposits:

FDs can be prematurely withdrawn, but most banks charge a penalty for early withdrawal. They are not tradable on any exchange.

Thus, bonds offer market liquidity, while FDs offer convenience through easy redemption options.

Taxation: FD vs Bonds Taxation Explained

Taxation significantly impacts the net return on both instruments.

Fixed Deposits:

Interest earned on FDs is fully taxable as per the investor’s income tax slab. TDS (Tax Deducted at Source) applies if the annual interest exceeds ₹40,000 (₹50,000 for senior citizens).

Corporate Bonds:

Interest from corporate bonds is also taxed as per the investor’s slab. However, if bonds are sold before maturity, capital gains tax applies

• Short-term gains (if held for < 12 months): taxed at income slab rates.

• Long-term gains (if held > 12 months): taxed at 10% without indexation. This makes bonds more tax-efficient for long-term investors compared to fixed deposits.

Which Should Investors Consider — Bonds or FDs?

Both instruments serve different investor profiles:

• Choose FDs if your goal is capital protection, short-term savings, or guaranteed returns with minimal risk.

• Choose Corporate Bonds if you want market-linked returns, are comfortable with moderate risk, and seek to diversify beyond traditional deposits.

An investor’s risk tolerance, time horizon, and income requirements should determine the choice between FDs and bonds.

The Way Forward: Diversification Is Key

As India’s bond market matures and becomes more accessible through digital platforms like BondScanner, investors have greater opportunities to explore regulated fixed-income options beyond conventional deposits.

Diversifying between corporate bonds and FDs can help balance stability, liquidity, and returns in a well-structured portfolio.

FAQs

1. What is the main difference between corporate bonds and fixed deposits?

Corporate bonds are market-traded instruments offering variable yields, while fixed deposits provide fixed returns set by the issuer.

2. Which offers higher returns — bonds or FDs?

Corporate bonds typically offer higher returns than fixed deposits of similar tenure, though they carry market and credit risk.

3. How is income from corporate bonds taxed?

Interest income is taxed as per the investor’s slab rate, and capital gains from selling bonds before maturity are taxed separately.

4. Are bonds riskier than FDs?

Yes, bonds carry credit and interest rate risks, while FDs are relatively safer, especially those with banks insured under DICGC.

5. Can retail investors buy corporate bonds easily?

Yes, retail investors can buy listed corporate bonds through SEBI-registered Online Bond Platform Providers like BondScanner.

Disclaimer

This blog is intended solely for educational and informational purposes. The bonds and securities mentioned herein are illustrative examples and should not be construed as investment advice or personal recommendations. BondScanner, as a SEBI-registered Online Bond Platform Provider (OBPP), does not provide personalized investment advice through this content.

Readers are advised to independently evaluate investment options and seek professional guidance before making financial decisions. Investments in bonds and other securities are subject to market risks, including the possible loss of principal. Please read all offer documents and risk disclosures carefully before investing.