Meera retired from a government post in Pune two years ago. Her pension covers most of her monthly expenses, and the rest of her savings sit in fixed deposits: four of them, spread across two banks and staggered so that one matures every few months. She can recite each rate from memory.
Last month, her son raised the subject of corporate bonds. She did not dismiss the idea. She simply wanted to understand what she would be getting into.
That is a reasonable place to begin, and the fixed deposit is the natural starting point.
How an FD works
A fixed deposit is straightforward. You place a sum of money with a bank for an agreed period, and the bank confirms the interest rate on the day you book it. That rate is locked in for the full term, regardless of any changes the bank makes to its rates afterwards. At maturity, you receive your principal along with the interest earned.
Tenures range from as short as seven days to as long as ten years, and you choose how the interest is paid. Meera opts for quarterly payouts, which work much like a modest second pension. Her neighbour’s daughter, on the other hand, chose a cumulative FD, in which the interest is compounded and paid out in full at maturity. She is saving for her studies three years from now, so the structure suits her well.
Why FDs remain popular
The appeal begins with simplicity. The rate is known from day one, and the maturity amount can be worked out on a phone in under a minute.
There is also little to monitor along the way. Shares and bonds are priced daily, and those prices move. A fixed deposit does not. Once booked, it can largely be left alone.
For most savers, that certainty carries more weight than the numbers alone would suggest. Behavioural economists refer to this as the certainty effect: people consistently favour a smaller, guaranteed outcome over a larger but uncertain one. It goes a long way towards explaining why FDs continue to dominate Indian household savings.
Deposits also come with insurance. The Deposit Insurance and Credit Guarantee Corporation (DICGC), a wholly owned subsidiary of the Reserve Bank of India, covers bank deposits up to ₹5 lakh per depositor per bank, inclusive of both principal and interest. This is precisely why Meera spreads her deposits across two banks rather than one.
Investors above 60 typically receive a slightly higher rate from most banks. The premium varies from one bank to another, so it is worth comparing a few before committing.
What if you need the money early?
Suppose you book a three-year FD and, eighteen months in, a family wedding calls for funds. Most banks allow premature withdrawal, but it usually comes at a small cost.
The bank will pay interest at the rate applicable to the period the deposit was actually held, rather than the original three-year rate. It may also levy a penalty, commonly in the range of 0.5% to 1%. The RBI allows each bank to set its own penalty, provided it is disclosed to the depositor at the time of booking.
It is therefore worth checking these terms before opening an FD, not after.
The tax angle
Interest earned on an FD is treated as income and taxed at your applicable slab rate. This holds true even for cumulative FDs. Although the interest is paid only at maturity, it is taxable in the year it accrues.
Banks also deduct TDS once your interest income from a single bank exceeds ₹50,000 in a financial year. For senior citizens, the threshold is ₹1 lakh. These limits apply from FY 2025-26. If your total income falls below the taxable limit, you can submit Form 15G to the bank (or Form 15H if you are 60 or older) so that no TDS is deducted.
So what are corporate bonds?
A corporate bond is, in essence, a loan you extend to a company. In return, the company pays you interest on pre-agreed dates and repays your principal at maturity.
For many years, this market was largely the preserve of banks and large institutions. Today, individual investors can buy bonds online, and the entry amount is far more accessible. In 2024, SEBI reduced the minimum face value of privately placed corporate bonds from ₹1 lakh to ₹10,000, a change that has played a significant role in opening the market to retail investors.
Bonds also offer considerably more flexibility. Maturities can range from one year to ten. Some pay interest monthly, others annually. Issuers, credit ratings and yields vary widely, which allows you to select bonds that align with when you are likely to need your money.
A bond is not an FD
This distinction is important.
With an FD, you are placing money with a bank. With a bond, you are lending money to a company, and your returns depend on that company’s ability to meet its payment obligations. This is known as credit risk. It is also worth noting that the ₹5 lakh DICGC cover does not extend to bonds.
A little more diligence is therefore required, and the credit rating is a sensible place to start. Agencies such as CRISIL, ICRA and CARE rate listed bonds, and these ratings offer a useful first filter. Ratings can change over time, however, so it pays to look at the issuer’s financial health as well.
Exiting early also works differently. A bond cannot be broken the way an FD can. It has to be sold to another investor on the exchange. Some bonds trade actively, while others may take longer to sell or fetch a slightly lower price. Bond prices also respond to changes in interest rates. That said, if you hold a bond to maturity and the issuer meets its obligations, you receive the returns you were promised at the outset.
Before investing in a bond, it helps to ask a few questions. Who is the issuer? What is its rating? When does the bond mature, and how often does it pay interest? Is it secured? And if you need the money early, how easily can it be sold? If any of these answers are unclear, it is worth waiting until they are not.
Do you have to choose?
Not necessarily. Meera could keep her emergency fund, along with anything she expects to need within the next year, in FDs. Money she will not need for four or five years could go into a small selection of bonds, once she has done her reading.
Vishal Goenka, co-founder of IndiaBonds.com, notes that bonds suit investors who value stability and predictable income, particularly conservative investors and senior citizens looking to preserve capital with lower volatility than equities. That description fits Meera closely, and it is one more reason to give her son’s suggestion serious thought.
Your own mix will depend on what the money is meant for, when you will need it and how much risk you are comfortable taking on. It also reflects a broader shift. RBI data shows that the share of bank deposits in household financial savings has declined from around 41% to 35% over the past four years, as savers increasingly spread their money across a wider range of instruments.
The question most people ask is, “Which one earns more?” A more useful question is, “What is this money for?” That is where the decision should begin.