Category Archives: Fixed Deposit

FMP is better than bank fixed deposit.
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Posted on April 17, 2012 by PankaajMaalde

Traditionally almost around 85% of the people in India invest their surplus funds in Bank Fixed Deposits, Postal Schemes etc. This clearly indicates that safety and security of the principal amount is the first priority when it comes to investment. Nobody cares whether the accretion on such investment is taxable or not. Also people do not evaluate whether the post tax returns will be able to beat inflation or not. Nobody can certainly deny the importance of safety but one has to always search for and evaluate the options which are equally safe but can give help you generate better returns or can give tax advantage over other equally safe investment avenues. It is important to have debt in your investment portfolio but it should be limited to certain percentage of total assets depending on time horizon and your risk profile.


Thumb rule says debt must constitute minimum equal to one’s age in percentage terms but it is advisable to allocate funds in debt depending on time horizon of your particular financial goal. If time horizon for a particular goal is just 1 year to 1.5 years than 100% of such corpus in debt makes sense. Most of the investors invest their funds in bank fixed deposit for time horizon of 1 to 1.5 years. But there are other alternatives available in the market which can give you better post tax returns compared to bank FDs and are equally safe. Mutual Funds FMP (Fixed Maturity Plans) are the better alternative for time horizon of around one year investments compared to bank fixed deposits which not only gives higher return but are also tax efficient. FMPs are closed ended schemes with the maturity period ranging from 370 days to 390 days which are commonly known as 1 year FMP. The maturity period of FMPs may vary from 90 days to three years but most prevalent and tax FMPs are one year FMPs.


Here we will discuss the pros and cons of only 1 year FMPs. These schemes invest 100% of their corpus in debt portfolio which consists of corporate and government bonds or Certificate of deposits issued by banks which are safe and rated. The funds thus invested are relatively safe compared to income funds as the volatility in the interest rates will not affect returns of the fund as the entire corpus collected in the scheme is invested for the fixed term which is almost equal to the tenure of the fund. These funds are closed ended in which investment can be made only during the NFO period. The schemes get listed at recognised stock exchanges but effectively these are not traded and volumes are negligible so one has to hold this till maturity for all practical purposes. Thus they are almost at par with bank FDs as far as tenure of investment and risk is concerned. The only difference is that in case of bank fixed deposit you know what return you will get at the time of making the deposit itself. Whereas in case of FMP the returns are not guaranteed it is market linked and returns will depend on the return of the portfolio. However one can find out as to what will be the indicative investment return from a particular FMP. The returns on this are higher than bank fixed deposit because they are floated for identified borrowers and as the volume size is big, they can easily negotiate for better deal. Moreover income arising out from this will be taxable under the head long term capital gain as the same is held for more than one year and investors get benefit of indexation. Please note that the benefit of indexation and concessional tax is not available in case of bank FD.


Since the FMP looks better than bank FD and if one wants to invest in FMP what one should look for while investing in FMP?


The one most important thing an investor needs to check before investing is the ratings of the portfolio in which the fund is likely to be invested. The investors should invest only in the schemes which will invest their funds in AA+ and above rated papers or bonds. The funds which invest in AA- papers or bonds or lower rated are more risky and one should be aware of risk involved in such schemes. For past one year of 1 year FMP is around 10% and above as compared to bank fixed deposit rate of 8.50%. Needless to say an FMP not gives higher return compared to fixed deposits but also has added tax advantage.

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Budget 2012 –Not Bad!
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Posted on March 16, 2012 by Harsh Roongta

Not Bad !! I think that about sums up the reactions to the annual light and sound show – The Budget. Given the financial constraints under which the Government was operating, the market was expecting some big taxation measures. The increase in service tax and excise duty from 10% to 12% was more or less expected and the absence of any other significant taxes provided the sigh of relief. It will soon be back to business as usual.

If the Finance Minister sticks to his words, we are soon going to see an increase in fuel prices as well. So expect a general rise in prices due to the increased excise duties and service tax. This way a quick respite from inflation is unlikely and interest rates are unlikely to drop in a hurry.

The FM announced a deduction of upto Rs. 25,000/- for investment in a yet to be notified Rajiv Gandhi Equity Savings Scheme. This is probably a case of bringing back the equity linked savings scheme (ELSS) through the back door since the DTC is slated to remove ELSS from the list of eligible deductions. While the details of the scheme are awaited, there is a significant term “new retail investor” used in the speech which seems to point to the deduction being available to only individuals not yet investing in the equity markets, as well as the deduction being available only once in a life time. If such conditions are there in the scheme, then it is unlikely to have much of an impact.

A good announcement was setting up of the central registry for KYC requirements which should provide relief from the multiple and painful KYC process that investors have to go through every time they decide to invest in a new asset class or with a new intermediary.

The doubling of the limit for tax-free bonds makes it clear that this asset class is here to stay and will become increasingly important for the high tax paying individuals and corporate bodies.

But the biggest take away for me from the Finance Minister’s speech was the announcement of setting up of the Credit Guarantee Funds for ensuring flow of credit to consumers buying affordable homes and students for higher and vocational education. Finally, it has dawned on the government that what consumers are looking at is access to credit rather than cheap credit. This Credit Guarantee Fund makes the affordable home buyer and the students taking education loans  bankable and they may actually be perfectly willing to pay market rates for the loans. Let’s hope that these guarantee funds are capitalized adequately and are set up quickly. Moreover it is important that the process of providing guarantees to the banks/lenders is streamlined for these important sectors get a big boost.

On the Income tax front, there is a relief in terms of the re-adjustment of slabs which will lead to tax savings upto a maximum of Rs. 22,660/- for individuals earning more than Rs. 10 Lakhs. In another good move, the definition of senior citizen has been changed to 60 years (from 65 years) across most of the important purposes like higher exemption limit, higher deduction for health insurance premium, etc.

In another relief, a separate deduction for savings bank interest upto Rs. 10,000/- per year has been introduced. The interest rate on savings bank accounts have climbed to 5.50%-7% in some cases post deregulation.  This deduction will improve the return for individuals for temporary liquidity kept in savings bank accounts. This will also facilitate the scheme where an individual need not file income tax returns subject to certain limits.

In a blow the finance minister has not renewed the extra deduction of of Rs. 20,000/- available for Infrastructure bonds. The exemption for the maturity proceeds of life insurance policies will now be available only if the insurance cover is at least 10 times the yearly premium. Thankfully, the wordings seem to be clear that it will apply only to policies issued after April 1, 2012 and exemptions of existing policies till March 31, 2012 have been clearly protected. This is a step in the right direction (the DTC provides for minimum 20 times protection ) though the life insurance industry is unlikely to agree.

There is a rather convoluted clause providing exemption of capital gains arising from the sale of residential property, provided you invest the proceeds in a company that invests in plant and machinery. This is supposedly to provide a fillip to entrepreneurs who start a manufacturing unit after selling off residential property. The process seems to be quite convoluted so the impact of any such clause remains to be seen.

A sub-limit has been created for preventive health check up of Rs. 5,000/- within the existing limit for health insurance deduction.

The most regressive move is the requirement to deduct tax @ 1% from the sale consideration of high value properties (Rs. 50 lakhs in major cities) after October 1, 2012. This is clearly a move to check tax evasion rather than a tax collection tactic. This is logically not needed since the registrars are supposed to file an Annual Information Report with the tax department, giving full details of the high value transactions. Of course, the tax department has very little control over the registrars who are state government employees and they may be either not filing these returns on time or perhaps not filing at all. For this singular failure, look at the amount of complication that the Government is subjecting property buyers to.

An individual is required to deduct and pay this tax before the property can be registered and there is no provision for refund if the deal does not go through for any reason. Thankfully, the individual is not required to get a Tax deduction account number but he will need to file quarterly statements to the tax deduction officer. But if he delays in filing this statement, he is subjected to pay the fee of  Rs. 200 per day, additionally he may have to pay a penalty as well. Now most people approach their chartered accountants to file returns after the year has ended and which is when they will discover the requirement to file statements and the fee payable will be a massive Rs. 60,000 to Rs. 70,000 plus the chances of a penalty payable. The existing provision requiring purchasers to deduct tax at source where the seller of a flat is a NRI has already resulted in purchasers avoiding  buying a flat from a NRI. Instead of removing this irksome and painful process it has been tagged on for purchase from resident individuals as well.

Clearly a completely unworkable and regressive move considering the fact that  the tax information network was created to free us from such process. This provision will either be dropped even before its enactment or if it is enacted, it will be meeting the fate of Banking transaction tax or the fringe benefit tax and get dropped in a years time. Hopefully it will not get enacted at all since it will damage the demand in the already dampened real estate market.

 

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Posted in Car Loan, Education Loan, Fixed Deposit, Health Insurance, Home Loan, Life Insurance, Mutual Funds, Personal Loan, Provident Fund, Regulations, Small Savings, Taxation | Tagged | 2 Comments

Save tax and earn higher interest with Bank Fixed Deposits
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Posted on February 20, 2012 by Balwant Jain

Earn higher rate of return and get tax benefits as well on your bank Fixed Deposits
Balwant Jain,  CFO apnapaisa.com

Fixed Deposits have become flavor of the season due to high rate of interest offered on them. Only a few of you would be aware that in addition to earning high interest, you can save tax also by investing in bank FD. Like other items of investments qualifying for deduction under Section, fixed deposits with schedules banks also qualify for deduction under Section 80C. For investment in Equity linked saving schemes,  the returns on your investments are not fixed and depend on performance of the equity market, you can lock your return for five years by investing in fixed deposits. Moreover you do not have to lock your investment for very long period like in the case of PPF if you invest in Bank FD.

Let us understand how the scheme of deduction under Section 80 C works in case of investment in bank fixed deposit.

Who can invest and how much?

Any individual or an HUF can invest upto Rs. 1 lac under this scheme. The investment has to be made in the form of a fixed deposit with any scheduled bank for a minimum period of 5 years. The maximum amount upto which a person can invest under this scheme is capped at Rs. 1 lac. The minimum amount is also capped at Rs. 100. You can invest further money in multiple of Rs. 100/-.

For making investment in FD you need to have PAN which shall be mentioned on the FDR with other details like name and  address of the person making the deposit.

The fixed deposit under this scheme can either be opened in single name or in joint names of not more than two persons – one of whom can even be a minor. However one point of caution here. The benefits of tax deduction under Section 80 C shall be available to the person who is named first in the bank FD, so ensure that the person making investment is named as the first holder on the FD.

You can appoint one or more persons as nominee to receive the money in case of death.  The  nomination form can be filled either at the time of making the deposit or any time thereafter. However in case the deposit is made for and on behalf of a minor, no nomination can be made in respect of such deposits. In case of death of the deposit holder the nominee can claim the money from the bank on the basis of death certificate of the original holder. In case the nomination is made in favor of more than one person, all nominees will have to sign the necessary documents in order to claim the money from the bank in respect of the deposits held in the name of the deceased.

Can you take loan against such bank FD or encash prematurely?

In order to obtain any loan you can pledge your NSC with government, banks including co-operative bank or cooperative credit societies but this facility is not available in case of bank FD. Even you cannot go for premature encashment of these deposits before completion of the five years.  However in case the first holder or the sole holder dies during currency of the term deposit, the second holder or the legal representative or nominee of the deposit can request for premature withdrawals of deposit under this scheme.

What if your shift from one place to other place? In case you are shifting from one city to another city, you can make a request for transfer of this bank FD from one branch of the bank to the branch of the bank where you are moving to. Please note this portability is not available across bank but is only available across branches of the same bank. So your fixed deposit can move with you.

Rate of interest

These fixed deposit schemes fare better than National Saving Certificates where the rate of interest is only 8.4% whereas these  FDs presently offer  you interest upto 9.75 % though lock in period of both the instruments of saving is five years now. Since rate of interest for both the schemes are fixed for the tenure, it always makes sense to invest in the these FDs as these give you higher return. These FDs are even better than deposits under Senior Citizen Scheme where the interest being offered is 9% whereas some banks offer 9.90%  rate to senior citizen.

The rates of interest currently offered by major banks on these deposits are given in the table:

Rate of interest on Tax Saving Bank FD

Name of the bank———-Rate of Interest (Normal)———-For Senior Citizen

Bank of Baroda———-9.00———-9.50

Central Bank of India———-9.09———-9.09

Union Bank of India———-9.40———-9.90

State Bank of India———-9.25———-9.75

Axis Bank———-8.25———-9.25

HDFC Bank———-9.25———-9.75

ICICI Bank———-8.75———-9.25

Unlike the PPF interest which is tax free, interest on such bank FD is taxable like interest on NSC and deposits under Senior Citizen Scheme. The bank will deduct tax at source on the amount of interest given to the investor.

Since the term of the Fixed deposit is fixed for five years it helps you in planning your future cash flows more accurately to meet your future cash requirements. This is particularly important for you in case you need to have access to your money for any short-term goal in the near  future like buying a house or providing for children’s education or marriage expenses. Since the rate of return is also fixed for the entire tenure, it insulates you against risk associated with return on your investments.

Other features:

You should be careful about preserving these  FDRs because in case you lose it or it is destroyed, you will have to follow an elaborate procedure for issue of duplicate FDR. This involves furnishing indemnity bonds and getting either sureties or bank guarantee for issue of such duplicate FDRs.

I hope you are able to make up your mind in favour of long term Fixed Deposits.

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Fixed Deposit>>> How well do you know about them?
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Posted on November 8, 2011 by admin

With banks offering higher interest rate on term deposits or more popularly known as Fixed Deposits (FDs) in the wake of rising repo rates and reverse repo rates in the last 18 months, FDs have once again become favored investment instrument. According to RBI’s Annual Report for the year 2010-11, the deposits (savings and term deposits) in commercial banks accounted for 42% of total household savings. This way we see that these are quite popular with retail investors. Still many of us don’t know what all it entails to make or break a fixed deposit.

So as a quick update, Fixed Deposit is an instrument where the money is invested with bank / institution for a pre-determined period of time at a pre-determined rate of interest.

Types of Fixed Deposits:

Regular Fixed Deposits – Here the amount is invested in the bank for a fixed time frame ranging from 7 days to 10 years.

Tax Savers – This scheme is designed to cater to the needs of income tax assesses and is available for a maturity period of 5 – 10 years. The amount cannot be prematurely withdrawn before completion of 5 years.

Special Fixed Deposits – These are available for specific time periods like 300, 555 and 1000 days etc. and usually carry a higher rate of interest if you opt for these tenures. If interest rate for a period of 270-364 days is 7% p.a., then the interest rate for 300 days FD can be 7.25% – 7.50% p.a.

Recurring Deposits – Individuals with regular source of income can save a fixed amount every month and also earn interest at the rate applicable to fixed deposits. These deposits mature at the end of specific term.

Floating Fixed Deposits – The term deposit under this scheme carries a variable rate of interest. The rate of interest is reviewed at periodic intervals and is automatically reset. Some of the banks offering this scheme are SBI, Indian Overseas Bank, J & K Bank, and Punjab National Bank etc.

Additional features of fixed deposits:

Sweep in / out and Super Saver Accounts:

Most of the banks have now linked Savings Account to the Fixed Deposits. Such accounts offers customers a flexibility to use the balance in FD accounts in times of any emergencies.
In Super-Saver Account, the customer can avail up to 75% of the fixed deposit amount as the Over Draft and the interest rates for the borrowed amount is usually 2% higher than the Fixed Deposit interest rates that he is earning.

In Sweep – In Account, the customer can use the amount in his fixed deposit incase of any shortfall in savings account. The balance amount in the fixed deposit continues to earn the same rate of interest. Similarly, the idle money lying in the customer’s savings account is invested in short term FD’s to maintain its liquidity.

Secured Credit Card against Fixed Deposit:

If a person is denied credit card due to various reasons like bad credit history, employer not listed etc. he can apply for a Secured Card. These cards are 100% guaranteed credit card against their fixed deposit in the bank. These cards offer credit limit up to 80% of their fixed deposit amount. Some of the cards issued by the banks are ICICI Bank Instant Gold Credit Card, Kotak Aqua Gold Card, Axis Bank Easy Credit Card and SBI Advantage Gold Card etc.

Loan against Fixed Deposits:

Incase of emergency instead of breaking the fixed deposit, the customer can take a loan against their existing fixed deposits. The banks offer loan upto 90% of the fixed deposit amount. The rate of interest is very nominal as compared to any other unsecured loans.

Tax Benefits & Implications:

Interest earned on fixed deposit is taxable under the head ‘Income from other sources.’
The amount invested in Tax Saver Deposits in a Scheduled bank is eligible for tax deduction under section 80C but the interest earned on the deposit is taxable.
If the interest on investment in fixed deposit exceeds Rs.10000/- per annum, then the tax will be deducted at the source. Investors can avoid TDS by presenting Form 15H, which states that the person does not have a taxable income.

Liquidity:

Tax Saver FD’s cannot be withdrawn before the completion of 5 years.
All fixed deposits can be liquidated anytime before their maturity period, but may attract a penalty of 0.50% – 1.00%. On pre-matured withdrawal of the deposit amount, interest is calculated at 0.5% – 1% below the rate applicable for the period of deposits has been held in bank. Certain banks like Kotak Mahindra Bank, Bank of India and Federal Bank do not charge any premature withdrawal penalty.
Some banks do not allow premature withdrawal if the account is held in the name of a minor.

Interest Rate:

Frequency – Interest is calculated on monthly, quarterly, half yearly or annually.

Payout – Customer can choose between regular payout of interest or re-investment option where the interest is reinvested in the FD and the entire principle with interest is paid back on maturity.

How safe are Fixed Deposits:

In the event of a bank failure, Deposit Insurance and Credit Guarantee Corporation (DICGC) protects bank deposits that are payable in India. The DICGC insures all deposits such as savings, fixed, current, recurring, etc.

The DICGC insures principal and interest upto a maximum amount of Rs. One lakh. For example, if an individual had an account with a principal amount of Rs.95,000 plus accrued interest of Rs.4,000, the total amount insured by the DICGC would be Rs.99,000. If, however, the principal amount in that account was Rs. One lakh, the accrued interest would not be insured, not because it was interest but because that was the amount over the insurance limit. All funds held in the same type of ownership at the same bank are added together before deposit insurance is determined. If the funds are in different types of ownership or are deposited into separate banks they would then be separately insured.
But customers should think before investing in FDs for long term so as to avoid being locked into a lower rate. Hence, they should take deposits for a period not exceeding one or one-and-a-half years, so that they can make use of any additional opportunities in future. Investors should review their existing deposits at regular intervals to ensure that any corrections can be made, if required.
Once investors feel that deposit rates have moved high enough, they can lock in FDs for a longer time to get more benefits.

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