Bank FD vs NBFC FD: Which One Offers Better Returns and Safety?

What is a bank fixed deposit?

For most Indian households, bank fixed deposits have long been a favourite investment choice. As the name suggests, bank FDs are financial products provided by banks under banking regulations. The fixed deposit interest rates can vary from bank to bank, just like the tenure and pre-mature withdrawal terms and conditions.

As a depositor, you can choose tenures ranging from a few days to several months or years, depending on your financial goals. Fixed deposit interest rates in banks are decided at the time of investment. Typically, the interest rate is paid periodically or compounded until maturity.

One key benefit of an FD in a bank is that it is insured. DICGC (Deposit Insurance and Credit Guarantee Corporation), which falls under the RBI, offers insurance cover of up to ₹5 lakh, for both principal and interest, per depositor per bank. This means, if your bank ever shuts down while your FD is still active, you will be compensated (up to ₹5 lakh).

For conservative investors looking for guaranteed returns on maturity, bank FDs can be an ideal option.

What is an NBFC fixed deposit?

NBFC stands for a Non-Banking Financial Company. So, an NBFC FD is a fixed deposit with a non-banking company. Just like regular FDs, here also you deposit money for a fixed tenure and earn interest at the predetermined NBFC FD rates.

Unlike bank FDs, NBFC deposits are not insured. Here, investors need to rely on the company’s credit ratings, which indicate the financial strength and ability of the company to repay deposits. Choose NBFC with ratings of at least AAA or AA+ to minimise the risk on your investment. NBFC deposits have gained significant popularity as NBFC FD interest rates are often higher than bank FDs.

Liquidity and withdrawal rules for NBFC FDs vary from company to company. While they may offer higher returns, in most cases, these FDs have stricter withdrawal rules or penalties for premature closure. As an investor, therefore, you need to carefully understand what you are getting into.

Bank FD vs NBFC FD

It is crucial to understand the difference between bank FD and NBFC FD, so that as an investor, you can make a well-informed choice.

Bank FD vs NBFC FD interest rates

As we’ve already discussed, NBFCs often offer higher FD interest rates. While bank FDs can start from as low as 4.5%, most non-banking FD rates are typically above 7.30% for a one-year-long deposit, to attract investors and compete with traditional banking products.

The actual FD interest rate depends on several factors, such as:

• The investment tenure, ranging from 7 days to 10 years
• The invested amount
• The prevailing economic conditions in the country, including fiscal and monetary policies
• The fluctuations in repo rates by the RBI

Because of these variations, it is highly recommended that you compare FD rates across banks and non-banking companies before making a decision. Remember, higher returns may be appealing, but safety, credit rating, and financial stability of the institution should also be considered.

Bank FD vs NBFC FD returns: Detailed calculation with example

For most investors, when it comes to choosing the type of FD, the fixed deposit interest rates in banks and NBFCs are the main deciding factor. A small difference in the FD percentage may seem minimal, but it can bring a significant difference in the maturity amount.

₹10 lakh investment for 3 years – Return comparison

Let us take a look at an example to know how FD interest calculation is done. Let’s take ₹10,00,000 as principal for a tenure of 3 years.

In the maturity value calculation formula,

• P stands for the principal amount that you deposit
• R stands for the rate of interest per annum
• T stands for the tenure in years.

Did you know that if your taxable income is below the basic exemption limit, you can claim the TDS deducted on your FD interest when you do the income tax e-filing?

How to choose between bank FD and NBFC FD?

Traditionally, bank FDs dominated the safe investment space because of their safety and reliability. But today, NBFC fixed deposits are becoming a popular alternative, often offering more attractive features and interest rates.

The choice between bank FD vs NBFC FD largely depends on an investor’s financial goals, risk tolerance, and need for liquidity. Let’s see who should choose what.

Conclusion

Fixed deposits, no matter the type, are an integral part of most financial portfolios, as they can bring stability even to aggressive portfolios. Bank FDs and NBFC FDs, both provide predictable returns, however, they differ in terms of risk, regulations, and features. While there’s no denying that NBFCs may offer higher interest rates, it has to be highlighted that banks often provide safety and deposit protection.

While FDs are considered to be a safe and secure way to park surplus funds, just like all investment products, you should evaluate your financial goals, risk tolerance, and investment tenure before investing. Comparing interest rates, safety measures, and liquidity conditions can help ensure the selected option aligns with long-term financial planning.