It was in 1989 that India introduced Certificates of Deposit (CDs) to increase the range of money market instruments in the country and thereby give investors greater flexibility in terms of utilization of their short-term funds.

What is Certificate of Deposit?

If you have a certain predetermined amount of money you want to deposit in a bank for a fixed period and the bank pays a certain interest on the amount then that  agreement is termed a “ Certificate of Deposit.” 

A Certificate of Deposit is a promissory note by the bank and is insured by the Federal Deposit Insurance Corporation (FDIC).

The Certificate of Deposit (CD) is issued in electronic form, meaning that the CD is held in dematerialised form by the issuer. When the CD matures, the investor then has 7 day grace period to decide what to do with the matured amount. Post maturity, the principal amount and the interest earned will be available for withdrawal.

Features of Certificate of Deposit

Let’s have a look at the salient features of a Certificate of Deposit:

  • Eligibility: Commercial banks or any other financial institutions which are allowed by RBI can issue CDs to individuals, companies, funds etc. ( Regional Rural Banks and cooperative banks cannot issue these certificates)
  • Transferability: Guidelines followed by Demat securities shall be followed while transferring certificates that are in Demat form. Electronic certificates can be transferred via delivery.
  • Maturity Period: The maturity period of a Certificate of Deposit issued by commercial banks can range from 7 days to 1 year. Rs. 1 Lakh is the minimum amount to be deposited.
  • Availability of Loan: A Certificate of deposit doesn’t have any lock-in period, hence it is unusual for banks to grant loans. It is also not possible for the banks to buy back certificates of deposit before the amount matures. Statutory Liquidity Ratio (SLR) and Cash Reserve Ratio (CRR) on the issued Certificate of Deposit Rates or prices are something that they should consider.
  • The interest earned on a certificate of deposit is typically considered to be taxable income.
  • A certificate of deposit cannot be publicly traded.

Advantages and Disadvantages of Certificate of Deposit:

Advantages Disadvantages
CD is less risky than stocks, bonds or other instruments since the principal amount remains safe CD has limited liquidity as withdrawal of any amount which is parked for a preferred duration is only possible by paying a penalty.
In comparison to savings accounts, CD offers a higher rate of interest and better returns If an investor fails to decide what to do with the matured amount, CD rates would be renewed by the banks which can sometimes be lesser.
An investor is given a grace period of 7 days to decide what to do with the matured amount. The rate of inflation will not be tied to the interest rates on CD and hence the value of money may decrease with increasing inflation


Different between a Fixed Deposit & Certificate of Deposit

Let’s have a look.

Certificate of Deposit Fixed Deposit
A Certificate of Deposit is an agreement with the bank to deposit a certain amount for a fixed period of time. The bank then pays the interest on the amount. The deposited amount will be locked in. This is a freely negotiable investment. On the other hand, a Fixed Deposit FD is a type of investment option provided by banks and other non-banking financial companies. This instrument provides a higher interest rate to the investor than the normal savings account. This cannot be negotiated freely.
While Certificates of Deposit offer high-interest rates and are low-risk investments Fixed Deposits are safe investments but are prone to inflation risks.
Certificates of Deposits carry an early withdrawal penalty risk and hence are not completely liquid. Interest on FDs is generally taxable, although some FDs may be eligible for certain tax exemptions. Additionally, not all FDs are easily liquidated, depending on the financial institution and the terms of the FD.


When do banks issue Certificate of Deposits in India?

Certificates of deposit carry high risks and there are times when some banks issue a CD more likely than other banks. There are two factors:

  • In the case of both low deposit growth and high demand for credit.
  • When there are stiff liquidity conditions in the market signifying that cash is tied up in non-liquid assets.

How are the rates of Certificate of Deposit determined?

Certificate of Deposit interest rates is generally determined by the following three factors:

  • Period of the Certificate of Deposit: The maturity duration of the Certificate of Deposit is the most important factor that determines the rate of interest. The longer duration generally results in higher interest.
  • Current Rate of Interest: It is always crucial to check the current rate of interest as the Reserve Bank of India (RBI) regulates and changes the interest rate of a Certificate of Deposit (CD) at certain intervals.
  • Expected Rate of Returns: This is another important factor that determines the Certificate of Deposit interest rates. Check which bank can provide the highest return on your deposited money. You can also seek an expert’s help on this.

How to choose a Certificate of Deposit?

The time you are investing the amount is directly proportional to the interest rate. Here are a few ways you can choose your Certificate of Deposit

  • An investor makes the decision of determining the period they are going to leave the money untouched. Post this they can start looking out for providers who offer higher rates of interest in that time frame.
  • If the interest rate is expected to rise in the future, one can consider shorter tenure so as to renew it at a higher rate of interest. The invested money is safe from fluctuations in the interest rate. 
  • For a better interest rate, choose a longer time frame for a Certificate of Deposit if the interest rate expects a rise or decline in the future.

From choosing CD to opting for the right business banking solution, the journey has never been a cakewalk.

But today banking has faced prominent evolution. From traditional banking to neo-banking the evolution of the fintech space has had a significant impact on businesses today.

Neobanking: Neobanks are new-age banks without any physical location, present entirely online. They provide digital, mobile-first financial solutions for payments, money transfers, lending, and more. 


Neobanks have taken business banking by storm since they make their daily financial operations seamless and automated. 

Read more: What is Fintech? Meaning and Evolution

New-age Business Banking in the same way has helped shape the financial operations of businesses today significantly.

  • One-stop banking solutions platforms like RazorpayX allow business owners to open current accounts, pay taxes, schedule payments, pay vendors seamlessly and check invoices from a single dashboard. This saves valuable time and effort. 
  • It is an accounting and banking platform that fills the gap between advanced banking solutions and finance professionals. It allows easy accounting software integration.
  • With RazorpayX Payroll, businesses can automate salary payments and provide insurance policies to their employees.


Frequently Asked Questions

What is a Certificate of Deposit?

If you have a certain predetermined amount of money you want to deposit in a bank for a fixed period and the bank pays a certain interest on the amount then that  agreement is termed a “ Certificate of Deposit.” 

What is the difference between CD and FD?

FDs provide a range of duration of investment i.e short term investment to ten years. Whereas CDs have a maximum tenure of 12 months and hence the period of investment will be limited.

Does CD earn interest?

The interest earned by your CD will also earn interest, hence stating that CDs usually pay compound interest daily or monthly.


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