Fixed Deposits - Chapter 4 of What Every Indian Should Know Before Investing

04 CHAPTER

FIXED DEPOSITS

FIXED DEPOSITS

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If you are a someone who has just started investing, your first step should be to make sure that the money you are investing remains safe and grows steadily over a period of time. You should therefore look at investing in debt assets as they are safer and less volatile than other investment options. There are many investment options within this asset type—a fixed deposit (FD) is probably the most popular amongst them all.

A fixed deposit is not only a safe investment option, but is also highly liquid. It is very easy to operate, with many flexible options available that allow you to manage your funds easily. However, like every investment option, FDs too have their shortcomings—they are not the ideal way to invest your savings for growth, especially if your income is taxed at a high rate. Let us understand the various aspects of FDs in this chapter.

THE FIXED DEPOSIT CONCEPT

The principal idea of an FD is to invest a fixed lump sum of money (called the principal) in a bank for a fixed period of time at a fixed rate of interest. Everything about this investment option is certain— the principal, tenure, and interest rate. At the end of the tenure, based on the instructions given by you, the bank will either renew the FD or pay you the principal along with interest.

Consider, for example, that you had invested Rs. 10,000 at 10% per annum (p.a.) for 5 years. At the end of 5 years, you'll be paid Rs. 16,386. We can calculate the maturity amount using the future value (FV) function of Excel as shown below: A

B

1

Fixed Deposits

2

Rate

10%

3

Period

5

4

Principal (PV)

−10000

5

Future Value

FV(rate,nper,pmt,pv)

6 7

C

(C2/4,C3*4,0,C4) Maturity Amount

Rs. 16,386.16

Table 1

Note that although the interest mentioned in this example is 10%

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p.a., banks usually calculate interest on a quarterly basis (every 3 months). In this case, the interest is calculated on a quarterly basis and added to the principal, which will earn you a slightly higher interest than 10%.

Note that in the formula, Rate (rate) is divided by four and the Period (nper) of 5 years is multiplied by four. Four is the frequency of compounding in a year as the interest is calculated every quarter; this will help you earn an interest rate slightly higher than the promised 10% p.a.

We can calculate this increased interest due to the quarterly compounding by using the Rate function of Excel.

8

Rate

=RATE(nper, pmt, pv, fv)

9

=rate(5,0,-10000,16386.16)

10

10.38%

Table 2

So the actual interest that you earn is 10.38% per year. This is also called the "effective annual interest rate". Some banks advertise this rate instead of the lower nominal rate of interest (10% in this case).

Similarly, some banks will mention the nominal interest rate when promoting a loan as that’s lower than the effective interest rate. If a bank offers a higher rate of interest than average, you could check if the rate they claim is the nominal rate of interest or the effective annual rate of interest.

The advantage of FDs is that once you’ve invested in an FD, the interest rate remains constant throughout the tenure of the FD, even if interest rates fall anytime during the tenure.

You could get tax deduction up to Rs. 1.5 lakh under Section 80C of the Income Tax Act by investing in FDs with a tenure of 5 years. However, there are certain restrictions applied on such deposits that you should be aware of.

Most investors prefer to receive interest at the end of the period along with the principal. These fixed deposits are known as cumulative fixed deposits. However, you also have the option of asking your bank to pay the interest rate on a monthly, quarterly, half yearly, or yearly basis instead of receiving the entire interest at

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the end of the tenure. This option can be useful for those who want to receive a steady flow of money at regular intervals; for example, retired people who want a monthly or quarterly income, college students living on a monthly stipend, etc. The interest payment frequency option must be chosen at the time of making the deposit.

For example, you could invest Rs. 1,00,000 at 9% for 3 years and receive around Rs. 750 every month, or Rs. 2,250 every quarter, for three years as interest. At the end of the three-year period, you'll get your principal back. However, in this case, the interest you earn will be comparatively lower than what you’d earn through a cumulative fixed deposit. This is because in non-cumulative deposits, the interest does not get a chance to compound, whereas in cumulative fixed deposits, your interest gets added to the principal every quarter and you earn additional interest on that cumulative amount.

You can open FDs of different durations and varying amounts. The duration can be from as few as 7 days to as long as 10 years, and the amount can be anything from Rs. 100 to an unlimited amount with some banks.

Note that the rate of interest for the same period could be different across banks since RBI allows banks to decide the rate of interest on their deposit schemes. Hence, to receive the maximum benefit on your investment, compare interest rates before you invest.

Senior citizens (60 years old and above) may get up to 0.50% higher rate of interest for deposits in their name. Again, this varies from bank to bank and must be checked before you invest.

An interesting option you have with FDs is that your investments with a tenure of 5 years could offer you income tax deduction up to Rs. 1.5 lakh under Section 80C of the Income Tax Act. However, there are certain restrictions applied on such deposits that you should be aware of. For deposits with tax benefits, partial withdrawal or premature withdrawal facilities will not be available, nor can you get a loan against the deposit amount, which are facilities offered by banks on other FDs. If you want to avail of tax benefits for your 5-year FD, you need to inform the bank before making the deposit.

These tax-saving deposits are available with public banks, private sector banks, as well as the post office, but not with co-operative banks and rural banks. In case of joint holdings in such an FD,

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the tax benefit is only available to the first holder. In case you are creating an emergency fund, do not invest it in a tax-saving FD as you will not be able to withdraw the amount at a short notice nor can you take a loan against it.

TYPES OF FIXED DEPOSITS

Now that we've seen how basic FDs work, let us look at some of the options available within them.

Flexible Fixed Deposit Scheme: In such deposits, you can withdraw part of the deposit before the maturity date.

Unlike a traditional FD, where you have to close the FD even if you need only part of the money, in case of flexible fixed deposits, you can withdraw only the amount that you need.

The amount left in the deposit will continue to grow at the fixed rate. Some flexible deposits allow you to deposit money multiple times during a year. This ensures that the money in your savings account does not lie idle. Even the tenure of these deposits is flexible and can be decided as per your needs.

There are various other options that these schemes offer depending on the bank. You should check the details of these schemes to determine the one that suits your need before you invest in it.

Savings Plus Account: If you keep surplus cash in your savings account, you can ask the bank to move a certain amount from your savings account into an FD for a period of your choice or a period determined by the bank (usually 1 year). For example, you could instruct the bank that you don't want to keep more than Rs. 10,000 in your savings account. Based on this instruction, if your savings account amount is Rs. 15,000, the bank will move the surplus Rs. 5,000 into an FD for 6 months or 1 year or any period determined by you or the bank. This amount will thus earn a higher rate of interest than it would have if it were lying in your savings account. On maturity, you could either choose to renew the deposit or have the amount returned to your savings account. Your bank will do all these transactions automatically.

Check with your bank for details.

Deposit with Overdraft Facility: In this type of FD, you can get an overdraft facility for your savings or current account.

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For example, if you created an FD of Rs. 1 lakh, the bank will transfer 75%–80% of this deposit into your savings account that you can withdraw. The FD will continue to earn interest on Rs. 1 lakh. You can repay the amount you have withdrawn in instalments, along with the specified interest, before the expiry of the FD. These are just a few of the possibilities available with an FD account. They may not be available with all banks, and some banks may offer other options. At times, even if a bank offers these facilities, they may be available only at certain branches.

You are required to check with your bank’s branch to know about the facilities it offers. Banks continuously work to make FDs as attractive as possible. Check with your bank to get the maximum advantage for your account.

With these and many other options available, FDs offer a great deal of flexibility to manage your money. The returns may seem modest—usually 4%–8% p.a.—but they are steady. In addition, your money remains in a fairly liquid state; in an emergency you can always close your account and get your money back within a working day. However, you may have to incur a small penalty on premature withdrawals. The penalty rate can vary with each bank. Some banks pay interest only for the duration the amount was deposited, while others may levy an additional penalty. For example, consider a bank that pays interest at the rate of 6% for fixed deposits of 3 years and 5% for fixed deposits of 2 years.

Now, if you deposit an amount at 6% for 3 years but decide to withdraw the amount at the end of 2 years, you will be paid interest at the rate of 5% (since the period for which your money was deposited was actually 2 years). On this 5% an additional penalty (maximum of 1%) may be levied by some banks. You should check the penalty clause with the bank before you open an FD. Apart from banks, even the post office and many private companies, financial institutions, and public sector companies offer deposit schemes that are similar to FDs. Let us take a quick look at them.

Post Office Time Deposits: The post office offers fixed deposits of

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1, 2, 3, and 5 years for individual and joint accounts. Investments in 5-year time deposits are eligible for tax benefits under Section 80C of the Income Tax Act. The interest offered is revised on a quarterly basis. For the 1st quarter of financial year 2020–21, the interest offered is 5.5% p.a. for 1-, 2-, and 3-year deposits, while it is 6.7% p.a. for 5-year deposits. Premature withdrawals are allowed with certain penalties. The minimum amount you can invest is Rs. 1,000.

Further investments have to be in multiples of Rs. 100. There is no maximum limit specified.

CORPORATE AND GOVERNMENT BONDS

Bonds are similar in concept to fixed deposits, in the sense that they are primarily an investment option where you lend your money to an institution for a certain period and you earn interest on it.

The major difference is that when you invest in a bank, it is usually safe and your investments are guaranteed up to a certain limit; by contrast, there is an element of risk associated with bonds. However, most bonds offer higher rates than bank fixed deposits. Therefore, it is an investment option that you could consider investing in. We will take a quick look at how bonds work and how you can invest in them.

Bonds are issued by the government or a corporate entity when they want to borrow money from investors. In return, investors will earn interest at a fixed or variable rate, also called the coupon rate, for a fixed period of time. In this way, bonds are similar to fixed deposits. However, unlike fixed deposits, bonds can be bought not only for short periods of time, such as a few months or years, but also for really long maturity periods of up to 40 years.

The longer the duration of an investment option, the longer is the risk associated with it. Therefore, long-duration investments usually offer higher interest rates to compensate for the risk. Same is the case with bonds. Longer-duration bonds will offer higher rates compared to lower duration bonds. For example, bonds offered by two private companies over a duration of 5 years and 10 years could have coupon rates of 9% and 11%, respectively. In addition, bonds offered by institutions that have higher potential to default will offer higher coupon rates compared to lower-risk bonds. For example, a 10-year bond offered by a private company could have a

FIXED DEPOSITS

coupon rate of 11%, while a 10-year government bond could offer you a coupon rate of 9%. This is because the government bond is essentially risk-free compared to the private company bond, which has a default risk, possibly resulting in capital loss.

Another point of difference is that unlike FDs, which are static investments, bonds can also be traded on stock exchanges like a stock. This allows you to earn a profit by selling them at a higher rate. Hence, bonds can earn you both interest as well as profit depending on how you decide to invest in them.

For example, you could invest Rs. 1 lakh in bonds issued by a public sector bank that offers a coupon rate of 10% over a period of 10 years. Now, you could stay invested in this bond and earn a steady interest of 10% every year (Rs. 10,000), or if the value of the bond increases due to market forces to Rs. 1.12 lakh (for example), you can sell the bonds for a profit of Rs. 12,000, immediately.

What will cause the price of a bond to increase? The force acting on the bond price is the rise and fall of interest rates in the market.

Because interest rates keep changing (as per RBI monetary policy), a bond that is issued at a higher interest rate can become attractive for buyers later. In the above example, consider that Rs. 1 lakh worth of bonds that you bought were valued at Rs. 100 per bond. As mentioned earlier, it offered a coupon rate of 10%. Now, after a year following your investment, if the RBI decreases the interest rate for some reason, new bonds of a similar nature would be offered by corporates at a lower interest rate: for example, 8%. Because your bond has a higher coupon rate, investors would prefer to invest in your bond rather than the newly issued bonds. However, you will not sell your 10% bonds at the same price (Rs. 100 per bond), but you will instead expect a premium for it. How much will be the premium? To adjust to the new rate of interest (8%), the new price of the bond will be around Rs. 112.

This way, your bond that had a face value of Rs. 100 can be sold at a premium of around Rs. 12. You could also decide against selling your bonds on the stock exchange and continue to hold the bonds till maturity and receive 10% interest every year. The rate of interest you earn will not be affected by the lowered interest rates in the market.

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Alternatively, if the RBI increases interest rates, then bonds issued earlier at lower interest rates can become less attractive and its face value will decrease in the market. For example, in the earlier example, the interest offered by the new bonds could be 12%. In this case, the value of your bonds will drop in the market, for example, to Rs. 96 from its face value of Rs. 100. If you do not wish to sell the bonds in the market, you can continue to hold it and earn interest at the same rate (10% as per our example) through the duration of the bond up to maturity.

Do note that there may not be ready buyers for the bonds whenever you decide to sell them. Unlike stocks, which are frequently traded, bonds have limited buyers who prefer to stay invested for the long term. So buy bonds with the idea that you may want to hold it till maturity.

While bonds do look attractive compared to FDs, there are also certain disadvantages that you should be aware of.

Unlike investments in fixed deposits that are made in banks and post offices, investments made in bonds issued by private companies and institutions cannot be considered totally risk-free.

You will have to understand the risk associated with such bonds before you invest. The history of the company offering the bond, its investment rating, existing market conditions, future prospects, etc., indicate the degree of risk involved in your investment. Credit rating agencies such as CRISIL, CARE, ICRA, and others analyse the issuer of bonds and provide ratings that help investors make a decision. The ratings range from AAA (highest) to D (defaulter). Bonds with the highest ratings are least likely to default and offer lower interest rates than bonds with lower ratings. However, there have been instances in the recent past where even bonds that had high ratings had failed. Many of the mutual funds, insurance firms, and retail investors who had invested in bonds issued by these companies suffered huge losses. Following these incidents, SEBI had made it mandatory for rating firms to disclose the probability of default of the issues rated by them. We will have to wait and see if this helps in protecting investor interests.

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Compared to corporate bonds, government bonds are totally risk-free as they are backed by the government. However, they offer lower interest rates compared to corporate bonds.

Government bonds that have maturity periods of less than a year are called treasury bills or T-bills, while those with longer maturity over a year are called government securities or G-Secs.

Interest earned on some of the government bonds are tax-free, making them even more attractive. (You can invest in government bonds indirectly by investing in mutual funds that buy government bonds or directly using your demat account.)

An example of a G-Sec that is available for investing looks like this (source RBI website): Coupon

7.17% paid on face value

Name of Issuer

Government of India

Date of Issue

January 8, 2020

Maturity

January 8, 2030

Coupon Payment Dates

Half-yearly (July 08 and January 08) every year

Minimum Amount of Issue/Sale

Rs. 10,000

Table 3

Until recently, government bonds were not available for investment to common or retail investors, but now they are. The minimum value of investment is Rs. 10,000, while the maximum amount is Rs. 2 crore. Investors can invest in the bonds through a bank or brokerage firms such as Zerodha, ICICIDirect, HDFC Securities, etc. The price at which a bond is available for buying is not decided by the government. The RBI announces the face value of the bond available for investing, and large institutional investors place their orders in a competitive bidding process. At the end of this bidding process, RBI calculates the weighted average of the bond based on the bids received. This becomes the price at which the bond will be available to all investors, including the retail investors. Retail investors cannot participate in the competitive bidding process.

The bank or brokerage firm can charge a maximum fee of 0.06% (or 6 paisa per Rs. 100 invested) for rendering this service. You can also invest in such bonds using NSEgoBid, the mobile and web app developed by the National Stock Exchange (NSE) or through BSE-Direct, the web-based platform launched by the

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Bombay Stock Exchange (BSE).

To see a list of all bonds available, visit www.nseindia.com and click "Bonds Traded in VM" within Live Market.

Some of the popular government bonds include: • Capital Gain Bonds (54EC Bonds): Investments in these bonds allow you to avail exemption up to Rs. 50 lakh in a financial year on the long-term capital gains that you have made from the sale of land or building or both. These bonds have a lock-in of five years and earn you an interest of 5.75% per annum, currently. To avail of this tax benefit, you should make the investment within six months from the date of transfer of the asset. For example, if you’ve sold your home after a period of three years of acquiring it for a profit of Rs. 60 lakh, you can invest up to Rs. 50 lakh of that amount in Capital Gain Bonds to avoid paying long-term capital gains tax on that amount.

• Tax-free Bonds: The interest earned on these bonds is exempt from income tax on maturity. They usually have long tenures of 10, 15, 20 years, or more. The minimum investment in these bonds is Rs. 1,000, and there is usually no maximum limit on the investment amount. These bonds are also traded on the stock exchange, although it may not be very easy to sell them due to limited buyers. Unlike FDs, there is no TDS on the interest you earn on bonds.

ADVANTAGES OF BONDS OVER FIXED DEPOSITS 1. While banks deduct TDS once interest is above a certain limit, there is no TDS on bonds.

2. You can sell bonds before the completion of tenure (subject to the completion of lock-in period, if any) without any penalties 3. Returns are usually higher than FDs of similar tenure 4. In case interest rates fall, you can earn higher return in the form of capital gains when you sell the bond.

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5. G-Secs are backed by the government of India so they are safer than bank FDs

DISADVANTAGES OF BONDS COMPARED TO FIXED DEPOSITS

1. Corporate bonds have higher risks than bank FDs. In case the issuer defaults, you could even lose your principal amount.

2. Liquidity can be an issue as you may not be able to sell and encash your bonds at a short notice.

3. You need to be aware of the various risk factors associated with a bond before you invest in it.

Overall, it is always a good idea to have some part of your investment in a steady and reliable investment option like an FD or bond. Just make sure that when you do it, you get the best deal available in the market.

HOW TO INVEST IN FIXED DEPOSIT SCHEMES

1. You can open a fixed deposit with any national, co-operative, private, or foreign bank.

2. You will need to submit Know Your Customer (KYC) documents.

3. If you have an online account with your bank, you may even have the option of opening an FD online.

4. Deposits can start as low as Rs. 100, but this varies from bank to bank.

5. Instead of investing in one large FD, you can invest in multiple FDs with smaller amounts. This way, if you need to redeem an FD due to an emergency, you can close just one of them and lose some interest on that one instead of having to redeem a large FD and losing interest on the entire amount.

POINTS TO CONSIDER BEFORE INVESTING

1. Is the rate of interest being offered better or at par with other banks?

2. What is the penalty for withdrawing your deposit before

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maturity? Is it comparable or less than other leading banks?

3. Is the bank close to your residence or place of work?

ADVANTAGES 1. FDs are a safe and reliable way to grow your wealth.

2. Interest rates are normally higher than the inflation rate.

3. Surplus cash in your savings account can be automatically moved into FDs. 4. Interest is compounded quarterly for FDs of duration 6 months and more.

5. Senior citizens are offered a higher rate of interest.

6. FDs are fairly liquid. They can be used to invest money for emergencies where you may need money at short notice. In case of an urgent need, you can withdraw the entire amount in a day by incurring a small penalty.

7. You can also get a loan against your FD (except for tax-saving FDs) from the bank that has issued the FD. 8. Deposits up to Rs. 5 lakh per person (principal + interest) in a bank are guaranteed by the Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of the RBI. Therefore, even in the rare possibility of a bank going bankrupt, you will still get back investments up to Rs. 5 lakh from the DICGC. The insured amount includes the sum of all deposits such as savings, fixed, recurring, and current accounts made by a depositor across all the branches of a single bank. DICGC covers depositors of nationalised, private, foreign (operating in India), and co-operative banks in India (except co-operative banks from Meghalaya and Union Territories of Chandigarh, Lakshadweep, and Dadra & Nagar Haveli). You can increase the cover for your investments if you hold joint accounts with names in different order. For example, if a couple Anil and Bina have two joint accounts where their names appear as a) Anil,

FIXED DEPOSITS

Bina and b) Bina, Anil, then each account will enjoy an insurance cover of Rs. 5 lakh. They will thus effectively have a cover of Rs. 10 lakh even though the money belongs to the same people. You can even spread the FDs in multiple banks to ensure that your deposits are insured. For example, you could deposit Rs. 5 lakh each in two different banks instead of depositing Rs. 10 lakh in a single bank.

You can read more on this at www.dicgc.org.in.

DISADVANTAGES 1. Rising inflation could decrease the real return of your FD investments. For example, if you invested in an FD when inflation was 4% and it reaches 6% by the time your FD matures, the real return on your investment is reduced by 2%. The returns from FDs will therefore not be spectacular.

2. You could end up locking your money for a long time.

3. The entire interest earned is taxable. Moreover, tax is deducted at source (TDS) at a rate of 10% if interest earned is above Rs. 40,000 (Rs. 50,000 for senior citizens). To avoid TDS, senior citizens can submit Form 15H while others can submit Form 15G. In both cases, although tax will not get deducted at source, you will need to pay the applicable tax as per the tax bracket you belong to.

4. Banks may levy penalty on premature withdrawals (usually around 1% of the interest rate offered).

INVESTMENT METER Safety: **** Liquidity: **** Returns:

* ** (where 5 stars indicate Excellent and 1 star indicates Poor.)

TAX IMPACT The interest you earn from fixed deposits is taxable. Banks

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deduct TDS at the rate of 10% if the total interest you earn is more than Rs. 40,000 (Rs. 50,000 for senior citizens) in a financial year. At most banks, the amount is checked at the branch level; therefore, if the interest from all your fixed deposits is more than this limit in a branch, the bank will deduct tax and then pay you the balance. However, if you hold deposits in different branches and the interest is less than Rs. 40,000 (Rs. 50,000 for senior citizens) at each branch, the bank will not deduct tax. However, many banks have implemented core banking system, which allows them to consolidate the interest from your FDs across all the branches. In such a case, interest may be calculated at the bank level and if it exceeds the taxable limit, the bank deducts tax. Irrespective of whether TDS has been deducted or not, the interest you earned must be added to your taxable income and the applicable tax must be paid as per your tax slab.

Note that for FY 2020-21, TDS on interest earned between May 14, 2020 to March 31, 2021 has been reduced to 7.5% (instead of 10%) considering the impact of COVID-19.

Example 1: If you had invested in FDs worth Rs. 8 lakh in a bank, TDS will be deducted in the following manner.

Amount at beginning of financial year

Annual interest earned at 7%

TDS (10% if interest earned is above Rs. 40,000 pa)

Interest reinvested into FD after TDS

Rs. 8,00,000

Rs. 57,487

Rs. 5,749

51,739

Rs. 8,51,739

Rs. 61,205

Rs. 6,121

55,085

Rs. 9,06,823

Rs. 65,163

Rs. 6,516

58,647

Amount on Maturity

Rs. 9,65,470

Rs. 18,386

1,65,471

Table 4

In the above example, the total interest you earned was Rs. 1,83,855. A sum of Rs. 18,386 has been deducted by the bank as TDS. While filing your returns, you’ll have to add Rs. 1,83,855 as your income and calculate the tax based on your tax bracket.

You can show that Rs. 18,386 has already been deducted.

Example 2: If you earned interest less than Rs. 40,000 per year, no TDS will be deducted by the bank as shown in the example below.

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FIXED DEPOSITS

However, the interest earned will have to be shown as income earned for the year and you’ll have to pay tax on it.

Amount at beginning of financial year

Annual interest earned at 7% (compounded quarterly)

TDS (10% if interest earned is above Rs. 40,000 pa)

Interest reinvested into FD after TDS

Rs. 4,00,000

Rs. 28,744

0

28,744

Rs. 4,28,744

Rs. 30,809

0

30,809

Rs. 4,59,553

Rs. 33,023

0

33,023

Amount on Maturity

Rs. 4,92,576

92,576

Table 5

In this example, you have earned an interest of Rs. 92,576.

No TDS was deducted as interest earned was always less than Rs. 40,000 every year.

In case you've NOT submitted your PAN details to the bank, TDS will be deducted at a rate of 20%. The TDS that is deducted can be shown when calculating the total tax to be paid for the year. In case of FDs made in the name of a minor, the TDS credit can be claimed by the person managing the minor's account. Senior citizens earning an income less than Rs. 3,00,000 can avoid TDS by filing form 15H. Example: Let's see how much tax you actually end up paying (refer to Table 4).

Interest earned in each FY as per earlier examples

TDS deducted by bank (10%)

If tax bracket at 20% (B)

Final tax that you need to pay (B1)

If tax bracket at 30% (C)

Final tax that you need to pay(C1)

20% (plus 4% cess )

(Tax amount – TDS)

30% (plus 4% cess)

(Tax amount – TDS)

Rs. 57,487

Rs. 5,749

Rs. 11,956

Rs. 6,207

Rs. 17,936

Rs. 12,187

Rs. 61,205

Rs. 6,121

Rs. 12,731

Rs. 6,610

Rs. 19,095

Rs, 12,975

Rs. 65,163

Rs. 6,516

Rs. 13,554

Rs. 7,038

Rs. 20,331

Rs. 13,815

Table 6

As you can see, investments in FDs are highly taxable. If you are in the highest tax bracket, you lose a substantial amount of the

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interest you earned by way of tax. For example, if you belonged to the 30% tax bracket, the total tax you pay in the first year for the interest earned on Rs. 8 lakh is Rs. 17,936. So in effect, even though you had earned an interest of Rs. 57,487 (7% interest rate), you eventually got only Rs. 39,551, which is a return of less than 5% instead of the 7% that the FD offered. That is not a high return on your investment if you consider the effect of inflation on the value of money. Therefore, while FDs are simple to operate, safe, and highly liquid, the returns are not great if you belong to the high tax brackets.

Investments up to Rs. 1.5 lakh in FDs of 5 years or more get tax benefits under Section 80C. The interest you receive from will, however, be taxable.

ADDITIONAL RESOURCES 1. The RBI website at www.rbi.org.in is a treasure-trove of information. But navigating through it can be a challenge for new users. To make it easier, RBI has a separate subdomain at https:// www.rbi.org.in/commonperson that you as a lay person can use to check the latest updates in the banking domain. A couple of links that I’ve personally found very useful are the FAQs and the Notifications sections.

Scan for quick access.

2. You can check details about Deposit insurance and credit guarantee for your investments in banks at https://www.dicgc. org.in/.

Scan for quick access.