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quity 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.

Net
Post Tax
Tax Slab Amount Invested Interest
Interest
Tax (Rs)
Return
(%)
(Rs)
(Rs)
Earned
(%)
(Rs)
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.

-Jitendra P.S.Solanki

The author is a Certified Financial Planner and founder of JS Financial Advisors. You
can reach him at jsfadvisors@gmail.com

http://www.moneycontrol.com/fixed-income/small-savings-schemes/
http://www.allbankingsolutions.com/Banking-Tutor/Highest-Interest-on-SavingFund-Accounts.shtml
http://www.allbankingsolutions.com/fdcal.htm

Axis Bank
5 years
Fixed: 2,212
Floating: 2,149
10 years
Fixed: 1,420
Floating: 1,349
15 years
Fixed: 1,184
Floating: 1,105
20 years
Fixed: 1,084
Floating: 998
(Photo: Bank website screenshot)
[Note: EMI per lakh (in Rupees) for a loan amount of Rs 30 lakh as on May 3, 2013]

State Bank of India

5 years
Fixed: Not available
Floating: 2,122
10 years
Fixed: Not available
Floating: 1,319
15 years
Fixed: Not available
Floating: 1,072
20 years
Fixed: Not available
Floating: 962
(Photo: Reuters Pictures)
[Note: EMI per lakh (in Rupees) for a loan amount of Rs 30 lakh as on May 3, 2013]