Equity markets have been
highly volatile during the last few years. Still recovering from the last fall,
coupled with steep rise in interest rates, most of the investors have since
looked for safer avenues to safeguard their investments. Although, among all
debt instruments, Public Provident Fund(PPF) ,
National Savings Certificate (NSC), Post Office Monthly Income Schemes (POMIS) always command high priority, Fixed
Deposits(FDs) by banks have gained popularity in recent times. The primary
reason is the attractive interest rates offered by the banks along with
sovereign guarantee, giving investors a sense of security.
However, within this euphoria,
most investors neglect taxation aspect while investing in fixed deposits. What
they failed to consider is that taxation can significantly lower returns
generated by this instrument.
Check out interest rate offered on
Fixed Deposits by various Banks
How FD is taxed
The interest income earned
through fixed deposit is taxable, if the interest amount exceeds Rs 10,000, in
any financial year. This income is added to your total income under header
"Income from other sources" and then taxed as per the income slab. A
very important point to note is that the interest income from fixed deposits
are taxed on accrual basis and not when actually received. This means that the
tax on interest income earned at the end of financial year have to be paid even
if the interest is credited at a later year. For e.g. if you are investing Rs
75000 in a fixed deposit for five years,
you will have to pay tax on liable interest for all financial years it spans,
even though the interest will be credited at the end of fifth year. Also, Tax
Deducted at Source (TDS) is deducted by the banks if the interest amount
exceeds Rs 10000 from one or through multiple investments. Even FDs in name of
the minor attract TDS, if the interest exceeds the limit.
What you earn?
In a higher interest rate
scenario, the going is good for investors in lower tax bracket. The investments
from fixed deposits yield them returns that are worth talking about. But as
your income go into the higher slabs the taxation starts affecting the net
earnings.
Consider an interest rate of
9.25% p.a. on a 10 year fixed deposit of Rs 2 lakh. Most of us will be lured by
this fixed return which is very high if compared with rates few years back.
However, the real picture is very different from what is presumed when taxation
is considered.
|
Tax Slab (%)
|
Amount Invested (Rs)
|
Interest (Rs)
|
Tax (Rs)
|
Net Interest Earned (Rs)
|
Post Tax Return (%)
|
|
10
|
200000
|
18500
|
1905.5
|
16594.5
|
8.29
|
|
20
|
200000
|
18500
|
3811
|
14689
|
7.34
|
|
30
|
200000
|
18500
|
5716.5
|
12783.5
|
6.39
|
As can be seen from the above
illustration individuals in higher tax slab of 30.9% tax, the post-tax returns
are 6.3% from this fixed deposit. As against this, an individual in the lowest
tax slab will be able to fetch 8.3% return on the same investment post
taxation. Surely, the benefit accruing to lower tax category has lot to cheer.
Should you Invest
Fixed Deposits are highly
liquid instruments and hence are best suited for goals where immediate fund
requirement is very high. However, sometimes, high interest rate scenarios like
existing today provides good investment opportunities for some category of
investors even for long term. Senior Citizens who earns .25-.50 basis more on
FDs and enjoy higher exemption limit in income tax are poised to benefit most
from this instrument. A retired banker (Senior Citizen) today is able to fetch
interest rate close to 11% on a 10 year FD from the same bank where he served.
Even if he pays the maximum marginal tax he will still earn close to 8% which will
give him a decent income. Inflation is something one has to live with but
effect of taxation can be reduced by deploying some tax planning strategies.
What you need to consider is post-tax earnings and not just the attractive
interest rates, to get a true picture of what you will receive at the end.
Source :
http://www.moneycontrol.com : http://orissadakparivar.blogspot.in/
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