Bank FD vs Corporate FD vs NCD 2026 — the risk-return ladder explained

Three fixed-income instruments — bank FD, corporate FD, NCD — span the same conceptual idea: lend money, get fixed coupon, get principal back at maturity. The risk premium between them looks small (1.5–3% rate gap), but the underlying risk profiles are wildly different. Here's how to actually think about the ladder in 2026.

The three rungs

	Bank FD (PSU/Pvt)	Corporate FD (AAA)	NCD (Listed AAA)
Rate (May 2026, 5Y)	6.50–7.50%	8.30–9.50%	9.00–11.00%
Backing	Bank balance sheet + DICGC ₹5L insurance	Issuing NBFC balance sheet	Issuing company + asset cover (secured) / unsecured
Default risk	Near-zero (PSU) / Low (private)	Low (AAA) / Moderate (AA, A)	Low (AAA) / High (BB and below)
Liquidity	Break anytime, ~1% penalty	3–6 month minimum lock	Listed on NSE/BSE — sell any day
Tax	Slab, TDS > ₹40K (₹1L for seniors)	Slab, TDS > ₹5K	Slab on coupon + LTCG/STCG on sale
Min ticket	₹1,000	₹10,000–₹25,000	₹10,000 (1 NCD)
Premature exit	Easy	Difficult / penalty	Sell on exchange (price risk)

Rung 1 — Bank FD (the floor)

Best rates as of May 2026:

• PSU banks (BoB 444-day): 6.60% / 7.10% senior
• Private banks (Axis 5Y): 6.70% / 7.20% senior
• Small Finance Banks (Equitas, Ujjivan, ESAF 5Y): 8.00–8.40%
• Post Office TD 5Y: 7.50% (sovereign — even safer than bank FD)

DICGC insurance covers ₹5 lakh per depositor per bank — including principal + interest. So spreading ₹15L across three banks gets full coverage. Above ₹5L per bank, you're betting on the bank's solvency.

SFBs and co-operative banks offer 0.50–1.00% higher rates because they carry slightly higher credit risk. Still RBI-regulated, still DICGC-covered. For amounts ≤ ₹5L per bank, this is a free 50 bps upgrade.

Rung 2 — Corporate FD (the middle)

NBFCs and corporates issue fixed deposits at higher rates than banks. They pay 100–150 bps more because they have no DICGC backing. Recent AAA-rated 5-year corporate FDs (May 2026):

• Bajaj Finance FD (AAA): 8.30%
• HDFC Ltd FD (AAA, post-merger continued): 8.10%
• LIC Housing Finance FD (AAA): 8.40%
• Mahindra Finance FD (AAA): 8.55%
• Sundaram Home Finance (AA+): 8.80%
• Shriram Finance FD (AA+): 9.10%

AAA-rated FDs have zero defaults in the last 20 years. AA-rated have a handful (DHFL 2019 being the major one). Below AA, default rates climb meaningfully.

Don't chase yield blindly — a 0.50% extra at AA vs AAA is rarely worth the headache. AAA corporate FD vs bank FD is the right risk-return upgrade.

Rung 3 — NCDs (the ceiling)

Non-Convertible Debentures are listed bonds issued by companies. They trade on NSE/BSE so you can buy or sell any business day. Key features:

• Higher rate than corporate FD by 50–150 bps because they're tradable (liquidity premium goes to investor)
• Secured vs unsecured — secured NCDs have specific assets pledged; unsecured rank with general creditors
• Coupon payout — monthly, quarterly, half-yearly, or annual (your choice at issue)
• Sell on exchange — but prices fluctuate with rates. Sell at par only if rates haven't moved; otherwise expect 1–3% price move per 100 bps rate change.

Recent public NCD issues at AAA rating (2026):

• HUDCO 10Y AAA: 8.80%
• REC 5Y AAA: 8.50%
• PFC 10Y AAA: 8.65%
• Tata Capital 5Y AA: 9.40%
• Edelweiss Financial 3Y AA: 10.25%

Tax treatment — the silent equaliser

All three rungs are taxed at slab rate on interest. For a 30% slab person:

Instrument	Pre-tax	Post-tax (30% slab)
Bank FD 5Y	7.0%	4.9%
Corporate FD AAA	8.5%	5.95%
NCD AAA	9.0%	6.3%
NCD AA	10.0%	7.0%
PPF (for comparison)	7.1%	7.1% (tax-free)

After tax, PPF at 7.1% beats every corporate FD and most NCDs for a 30% slab investor. SCSS at 8.20% for seniors beats even AA NCDs after considering 80TTB. Tax-free instruments + safe debt are usually a better combo than chasing rates.

How to actually allocate

Conservative (60+ retiree, capital preservation)

• SCSS + Post Office TD 5Y: 50%
• Bank FD (PSU): 30%
• AAA corporate FD: 15%
• Liquid fund / savings: 5%
• Target IRR: ~7.5% post-tax

Moderate (35–55 yo, mix of safety + yield)

• PPF (annual): part of 80C
• Bank FD 3Y: 30%
• AAA corporate FD or NCD: 40%
• Equity MF: balance per asset allocation
• Target IRR on debt portion: ~8.5% pre-tax

Aggressive (25–40 yo, yield-seeking)

• SFB FD (5Y, under ₹5L): 20%
• AAA NCD secondary market: 50%
• AA NCD (selected): 20%
• Liquid fund: 10%
• Target IRR: ~9.5% pre-tax

NCD market mechanics — what to watch

• Yield to maturity (YTM) matters more than coupon. A NCD with 9% coupon trading at ₹1,020 (premium) has a lower YTM than coupon. Always check YTM at purchase.
• Pre-CRA notice — credit rating agencies put issuers on "watch negative" before downgrades. Sell before the downgrade is announced (post-downgrade, prices crash 5–15%).
• Tax-free NCDs (REC, NHAI, IRFC issued pre-2014) are still tradable in secondary market. Worth checking if you're in 30% slab — 5.5% tax-free = 7.86% pre-tax equivalent.
• Capital gains on sale — held < 12 months = STCG at slab; held > 12 months = LTCG at 12.5% (post Budget 2024).

The hidden trap — early redemption

Bank FDs let you break with 1% penalty. Corporate FDs may have 3–12 month lock-ins with severe penalties. NCDs trade on exchange — you can always sell, but the price might be below par if rates have risen. The "lock-in advantage" of safer instruments often gets ignored at purchase but matters at panic.

Run your numbers

Use our FD calculator with any of these rates to see exact maturity. For NCDs trading at premium/discount in secondary market, use the compound interest calculator with the actual YTM.

FAQs

Is corporate FD safer than NCD?

Same underlying credit risk for the same issuer. But NCDs are listed (you can sell) while corporate FDs are bilateral (you wait or pay penalty). NCDs are technically more flexible — but their listed price reflects market sentiment, so you might sell at loss.

What is the difference between secured and unsecured NCD?

Secured NCDs have specific assets (property, receivables, equipment) pledged. In default, they get paid first from sale of those assets. Unsecured NCDs rank with general creditors and recover only what's left. Difference matters in default — pick secured for high-yield issues.

How does TDS work on these?

Bank FD: 10% TDS on interest above ₹40K/year (₹1L for seniors). Corporate FD: 10% TDS above ₹5K/year. NCDs: TDS at 10% on listed, 20% on unlisted. Submit Form 15G/H to avoid TDS if below taxable threshold.

Can I hold NCDs in my demat?

Yes — listed NCDs sit in your regular demat account like equity. Coupon credits to your bank monthly/quarterly/half-yearly. Sale proceeds settle T+1 like stocks.

Are tax-free bonds still issued?

The government stopped issuing fresh tax-free bonds in 2016. Existing issues (REC, NHAI, IRFC, HUDCO, PFC) trade in secondary market until maturity. Available yields are 5.0–5.8% tax-free — equivalent to 7.1–8.3% pre-tax for 30% slab.

Should I buy NCD IPO or secondary market?

NCD IPOs are usually retail-friendly but oversubscribed; allotment is limited. Secondary market gives more selection and you can pick the exact YTM, but always check liquidity (some NCDs trade only a few hundred per day).