A Certificate of Deposit or CD is a fixed-income instrument that provides a guaranteed interest over a set period. Let’s explore Certificates of Deposit and their meaning and benefits.

What is a Certificate of Deposit?

A Certificate of Deposit is a type of short-term investment where you deposit money with a bank or financial institution for a fixed period. In return, you earn a guaranteed interest rate. Certificates of deposit are issued in electronic form or as an Usance Promissory Note (written promise) to pay after a set time.

In India, the Reserve Bank of India (RBI) regulates Certificates of Deposit and sets the guidelines and rules to ensure they remain a safe and reliable investment option.

How does a Certificate of Deposit work?

A Certificate of Deposit allows you to deposit a lump sum with a bank or financial institution for a fixed duration in exchange for a guaranteed interest rate. Certificates of Deposit are issued with a minimum amount of ₹ 5 lakh and in multiples of ₹ 5 lakh thereafter. The tenure varies depending on the issuer. Banks offer Certificates of Deposit with a maturity period between 7 days and 12 months, while financial institutions issue Certificates of Deposit for durations ranging from 1 to 3 years.

So, your money stays invested for the full term. At the end of the term, you get the initial deposit along with the accrued interest. The interest earned depends on the deposit amount, the interest rate, and the tenure.

Here’s an example to understand how a Certificate of Deposit works:

Suppose you invest ₹ 5 lakh in a certificate of deposit for 100 days at an interest rate of 6% per annum.

Interest = P × R × T

Where:

• P = ₹ 5,00,000 (Principal amount)
• R = 6% (Annual interest rate)
• T = 100 days (Converted into years as 100/365)

The interest earned on the investment would be ₹ 8,219.18. At maturity, you would receive a total of ₹ 5,08,219.18 (principal + interest).

Who issues a Certificate of Deposit?

Scheduled commercial banks

Major commercial banks, except regional rural banks and local area banks, can issue Certificates of Deposit.

Small finance banks

Certain small finance banks are eligible to issue Certificates of Deposit.

Authorised financial institutions

All-India financial institutions, permitted by the RBI, can issue Certificates of Deposit.

What are the Benefits of Investing in Certificates of Deposit in 2025?

• Fixed income: A Certificate of Deposit guarantees a return at the end of its maturity term. The interest rate is fixed at the time of investment, which makes it a stable and low risk investment option
• Not linked to market fluctuations: Unlike stocks or mutual funds, Certificates of Deposit are not affected by market volatility. Your returns remain steady, and you benefit from a low-risk investment with better peace of mind
• Higher interest rates than savings accounts: A Certificate of Deposit offers higher interest rates compared to regular savings accounts, which allows your money to grow at a better rate

What are the Features of a Certificate of Deposit?

• Minimum investment amount: Certificates of Deposit are issued in a minimum denomination of ₹ 5 lakh and in multiples of ₹ 5 lakh thereafter
• Issuance: They can be issued by scheduled commercial banks and some all-India financial institutions permitted by the RBI. However, they cannot be issued by regional rural banks and local area banks
• Discount: Certificates of Deposit can be issued at a discount to their face value, allowing you to purchase them at a lower price and receive the full-face value at maturity. Banks and financial institutions can also issue certificates of deposit with floating interest rates
• Eligibility: Individuals, banks, companies, corporations, primary dealers, trusts, funds, associations, etc. can invest in Certificates of Deposit in India
• Form: Banks and financial institutions typically issue Certificates of Deposit in dematerialised form. However, investors can request a physical certificate if they prefer

How to buy and sell Certificates of Deposit?

You can buy Certificates of Deposit from banks and financial institutions. Buying and selling CDs work much like trading stocks. First, you and the seller agree on the price and terms. The seller then authorises their depository participant to transfer the Certificates of Deposit using a delivery instruction slip. Once approved, the Certificates of Deposit move from the seller’s account to your account.

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