Senior citizen? Know how corporate bonds compare with fixed deposits on five key parameters

While bank fixed deposits are already popular among senior citizens, corporate bonds have emerged as another fixed-income investment option that they may consider. However, when it comes to choosing between fixed deposits and corporate bonds, one question often dominates the minds of investors, including senior citizens: Are corporate bonds better than fixed deposits, or vice-versa?

There isn't a straightforward answer to the above question, as both financial instruments have pros and cons. Moreover, choosing the right investment product depends on several other factors such as individual risk tolerance, time horizon, and required liquidity. In such a situation, one can make a decision only by comparing both options.

This article compares corporate bonds and fixed deposits on five key parameters such as returns, risks, taxation, flexibility, and tenure.

Returns

Corporate bonds generally offer higher returns compared to fixed deposits.

“Corporate bonds stand out mainly because of their higher return potential. While fixed deposits from leading banks typically offer interest rates in the range of 5.5 to 7.4%, AAA and AA-rated corporate bonds can provide anywhere between 7.5 and 9%, sometimes even more,” says Saurav Ghosh, co-founder at Jiraaf, an online bonds platform.

Risks

Bank fixed deposits are considered safer than corporate bonds as they are covered by RBI's deposit insurance guarantee of up to ₹5 lakh. There is no such guarantee in corporate bonds but they rely on the issuer’s creditworthiness.

Vishal Goenka, co-founder of IndiaBonds, says, "Bonds from well-rated issuers generally offer greater security, but potential risks remain."

According to experts, the following risks are linked to corporate bond investments:

• Credit risk
• Interest rate risk
• Inflation risk
• Reinvestment risk

"Credit risk is topmost: if a company’s financial health falters, it may default on coupons or principal. Interest rate risk also matters—bond prices often drop when rates rise. Liquidity can be an issue if the bond is thinly traded, forcing investors to sell at a discount,” says Goenka.

“For seniors relying on stable income, matching maturities to expected expenses helps avoid premature exits. Reinvestment risk emerges if maturing bonds must be reinvested at lower yields. Additionally, inflation can erode real returns over time," he adds.

Ghosh also says, "The most obvious concern is credit risk—the possibility that the issuer defaults on interest payments or even principal repayment.”

However, experts say corporate bond investors can avoid some risks by sticking to high-rated bonds.

"Mitigating these risks includes selecting investment-grade bonds (AA or above), diversifying across issuers, and keeping an eye on market conditions. With prudent selection, corporate bonds can provide consistent income without unduly compromising capital safety," says Goenka.

Flexibility

You can break a fixed deposit any time and get your money immediately for emergency needs. But this may not be possible in corporate bonds all the time.

“With fixed deposits, early withdrawals come with penalties, but they are still relatively simple. Corporate bonds, on the other hand, may not always have a readily available buyer in the secondary market,” says Ghosh.

In bank fixed deposits, interest rates are fixed for the entire tenure. Corporate bonds, however, offer the flexibility to benefit from market prices and interest rate movements.

"Beyond higher yields, corporate bonds offer flexibility through secondary market trading—investors can exit before maturity, unlike many saving schemes with firm lock-ins. They may also benefit from price appreciation if interest rates drop or if the issuer’s credit rating improves, a feature unavailable in fixed deposits,” says Goenka.

Taxation

Interest income from fixed deposits and unlisted bonds is taxed at individual slab rates. However, there is some tax relief in case of listed corporate bonds.

“Capital gains taxation has changed. If an investor sells a listed corporate bond within 12 months, gains are taxed at their slab rate. For listed bonds held for over 12 months, long-term capital gains are taxed at 12.5%, with an exemption on the first ₹1.25 lakh of gains in a financial year,” says Ghosh.

“This makes corporate bonds more tax-efficient than fixed deposits, where entire interest is taxed at the highest slab with no relief. Additionally, corporate bonds attract TDS only if interest income exceeds ₹5,000 annually,” he adds.

Tenure

Fixed deposits have tenures ranging from 7 days to 10 years. In contrast, corporate bonds come in varied tenors and structures (e.g., secured bonds, callable bonds), enabling investors to tailor their portfolios based on timelines and risk appetite, say experts.