With the RBI slashing repo rate by 75 basis points and 40 basis points on March 27, 2020 and May 22, 2020 respectively, the scheduled banks have reduced the fixed deposit interest rates commensurately. Banks accept Fixed deposits for the period ranging from 7 days to 10 years and pay interest depending on the period of deposit. Some of the banks charge penalty for premature withdrawal of the deposits. Tax rebate up to an amount of Rs 1.50 lakh, under section 80 C of Income Tax Act, 1961, is available on bank fixed deposits with lock-in period of 5 years.
While interest earned on fixed deposits is fully taxable in the hands of depositor, banks are required to deduct tax at source (TDS) at the rate of 10% when interest amount in a financial year exceeds Rs 40,000/-. If the depositor doesn't submit PAN then TDS @20% is applied. TDS is applicable for senior citizens when interest payable exceeds Rs 50,000/- p.a., which is tax free. There is a provision for submission of form 15H for senior citizens and 15G for others in the beginning of financial year if tax at source is not to be deducted by the banks provided total income doesn't fall under income tax bracket. For non-resident ordinary (NRO) fixed deposits, TDS @30% is applied. No TDS is applied on non-resident external (NRE) fixed deposits and foreign currency non-resident (FCNR) deposits as the interest income is tax free on these deposits.
Interest rates are subject to change at banks' discretion
Savings Deposit Interest Rates
While majority of the aforementioned banks offer lower interest rate on deposits up to Rs 50 lakh and differential rate for an amount exceeding Rs 50 lakh barring Bank of Baroda which offer 3.00% for an amount up to Rs 1 lakh and 2.75% for an amount above Rs 1 lakh; IDFC Bank pays 6% for an amount up to Rs 1 lakh and 7% when amount exceeds Rs 1 lakh; and SBI offers 2.75% flat irrespective of deposit amount. While there is no TDS applicable on savings deposit interest rate, an amount up to Rs 10,000/- is exempt in a financial year under section 80 TTA of Income Tax Act, 1961. For non-resident ordinary savings deposits, TDS @30% is applicable on interest earned whereas non-resident external savings deposit interest is tax-free.
Alternate Investment Options
Depending upon risk profile of the depositor/investor, alternate investment avenues are certificate of deposit (CD), postal deposit schemes, senior citizen savings scheme (SCSS), national savings certificate (NSC), kisan vikas patra (KVP), sukanya samruddhi yojana (SSY), sovereign gold bonds scheme, public provident fund (PPF) max Rs 1.5 lakh, 7.75% GoI taxable bond scheme withdrawn w.e.f. 28th May 2020. Interest rates on small savings schemes (SSS) are reset at the beginning of every quarter. Sovereign gold bonds offers interest @2.5 p.a. payable half-yearly.
Investors with moderate and aggressive risk profile could invest in direct equities, equity mutual funds, debt mutual funds, national pension system (NPS), balanced funds, hybrid funds, index funds, unit linked insurance plans (ULIP) and alternate investment funds (AIF). Returns on market linked instruments are not guaranteed though empirical data suggest good returns over long term. Real rate of return has to be arrived at by deducting prevailing inflation rate and marginal income tax slab rate or applicable rate from the nominal returns generated by the fund. Short term capital gains (STCG), Long term capital gains (LTCG) tax, and indexation benefit is applicable depending on period of investment that vary for equity and debt instruments. One should consult Financial Advisor before making an investment decision into market linked instruments.
Keep watching this space for more updates on fixed income/market linked investments!
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