Take a 5-year Bank Fixed Deposit (FD) in the largest bank in India and get interest upto 18.55% per annum. Too good to be true – State Bank of India says so! The offering is:-
Put in Rs 10,000 in a 5-year FD with the bank at 9.25% per annum to get back Rs 15,797/- after 5 years. However, since you get a tax saving of Rs 3090 under Income Tax Section 80C, assuming a tax bracket of 30%, your net invested amount is actually Rs 6910/-. Thus, getting back Rs 15,797/- on an investment of Rs 6910/- after 5 years amounts to an annualised return of 17.77%. (Similar calculations for Senior Citizens, who get an interest of 9.75% amounts to a return of 18.55%!!)
Is it true? Can an almost risk-free investment give you 17.77% return?
If so, why does anybody need to invest into anything else ever....?
We have heard of people who have put in substantial amount of their money in such FDs, taking the contents of the advertisement to be the whole truth.
Actually, State Bank of India’s advertisement is Truth - Ashwathama style! What it does not reveal to you is the following:-
1. When the FD matures after 5 years, you would have to pay tax on it as per your tax slab. If you are in 30% slab now (the advertisement calculations are done on this tax slab) and continue to remain so, then your interest gain of Rs 5797/- would get reduced to Rs 4005/- due to a tax liability of Rs 1791.27.
2. It presupposes that you have not already used up your tax-saving limit of Rs 1 Lakh under Income Tax Section 80C. This is the same section under which you claim your major deductions for Provident Fund (PPF / EPF / DSOPF / Company PF), NSC, Life Insurance Policies’ premium (including AGIF/AFGIS/NGIS), children tuition fees and principal part of your Home Loan. If you are already in 30% bracket (or even 20% bracket), there is very less likelihood that you would not have already exhausted this Rs 1 Lakh limit under IT Sec 80C.
If the above two conditions apply to you, then, with SBI paying you 9.25% interest, your post-tax returns after 5 years would actually amount to a mere 6.96% per annum only and not the fancy 17.77% being advertised by SBI!! Also remember that in this type of tax-saving FDs, there is no facility of premature withdrawal, even with penalty.
In fact, there are much better ways to save tax under IT Sec 80C, like Provident Fund, Equity Linked Savings Schemes of Mutual Funds etc, than these FDs, notwithstanding the slick advertising.
If instead of 30% tax bracket, you are in 20% or even 10% tax bracket, but have used up your Rs 1 Lakh limit of IT Sec 80C, your actual post-tax returns after 5 years would still be only 7.88% and 8.75% per annum respectively.
Moral of the Story: It is YOUR hard-earned money. Consider all the possible angles or consult an unbiased Financial Advisor before you make any major financial investments. Look before you leap is the mantra!
Put in Rs 10,000 in a 5-year FD with the bank at 9.25% per annum to get back Rs 15,797/- after 5 years. However, since you get a tax saving of Rs 3090 under Income Tax Section 80C, assuming a tax bracket of 30%, your net invested amount is actually Rs 6910/-. Thus, getting back Rs 15,797/- on an investment of Rs 6910/- after 5 years amounts to an annualised return of 17.77%. (Similar calculations for Senior Citizens, who get an interest of 9.75% amounts to a return of 18.55%!!)
Is it true? Can an almost risk-free investment give you 17.77% return?
If so, why does anybody need to invest into anything else ever....?
We have heard of people who have put in substantial amount of their money in such FDs, taking the contents of the advertisement to be the whole truth.
Actually, State Bank of India’s advertisement is Truth - Ashwathama style! What it does not reveal to you is the following:-
1. When the FD matures after 5 years, you would have to pay tax on it as per your tax slab. If you are in 30% slab now (the advertisement calculations are done on this tax slab) and continue to remain so, then your interest gain of Rs 5797/- would get reduced to Rs 4005/- due to a tax liability of Rs 1791.27.
2. It presupposes that you have not already used up your tax-saving limit of Rs 1 Lakh under Income Tax Section 80C. This is the same section under which you claim your major deductions for Provident Fund (PPF / EPF / DSOPF / Company PF), NSC, Life Insurance Policies’ premium (including AGIF/AFGIS/NGIS), children tuition fees and principal part of your Home Loan. If you are already in 30% bracket (or even 20% bracket), there is very less likelihood that you would not have already exhausted this Rs 1 Lakh limit under IT Sec 80C.
If the above two conditions apply to you, then, with SBI paying you 9.25% interest, your post-tax returns after 5 years would actually amount to a mere 6.96% per annum only and not the fancy 17.77% being advertised by SBI!! Also remember that in this type of tax-saving FDs, there is no facility of premature withdrawal, even with penalty.
In fact, there are much better ways to save tax under IT Sec 80C, like Provident Fund, Equity Linked Savings Schemes of Mutual Funds etc, than these FDs, notwithstanding the slick advertising.
If instead of 30% tax bracket, you are in 20% or even 10% tax bracket, but have used up your Rs 1 Lakh limit of IT Sec 80C, your actual post-tax returns after 5 years would still be only 7.88% and 8.75% per annum respectively.
Moral of the Story: It is YOUR hard-earned money. Consider all the possible angles or consult an unbiased Financial Advisor before you make any major financial investments. Look before you leap is the mantra!
Very well calculated Col saheb ......... beware of such falls advertisement .....be smart like Hum Fauji. Well done sir .... Regards. Sudhir Vasudev
ReplyDeleteThanx Mr Sudhir. Just a few things many of us overlook and get into investments we never intend to make.
DeleteWell the analysis is accurate. However it must be understood that a lesser rate of return is ok at late stage of life rather than risking even your principal while investing in ELSS or MF where NAV may go down in turbulent and volatile market.
ReplyDeleteRegards, Manoher
The contantion is absolutely right and undisputed. But if one is not ready to take on the turbulence of market-related instruments where there is a risk and own capital MAY suffer, then why should he agree to a return which is well below the inflation rate and hence is a sure-shot depletion of value of own money?
DeleteMy contention is that there are much better, equally safer avenues available which give higher returns and are more tax-efficient. Eg, FMPs (Fixed Maturity Products) and MIPs (Monthly Income Plans). Both are mutual funds. While former is like a FD where one can take take a FMP investing only in Govt paper and Bank FDs, the latter has just about 15% equity component and 85% safe debt-based investments with full liquidity. The returns are likely to be in 10%+ range today and investments beyond 1 yr get classified as LTCG with indexation linking. This aspect reduces tax drastically with the passage of each year.
Thank you sir,
DeleteYou will agree that it is difficult, if not impossible , to convince people who have burnt their finger in ELSS/MFs and there are many of such persons.
Nevertheless any suggested instruments from your point of view
Regards,
Manoher
To suggest a product without knowing your overall profile, what have you already invested in, what is your aim from that investment and what is your risk profile, would be incorrect. Please interact with us on contactus@humfauji.com or ring up on 011-4054 5977 / 9999 022 033 for the same.
DeleteWe will need to know what are you already doing, what are you comfortable with and what further can be done by you to be able to give you some meaningful advice. Please interact with us on contactus@humfauji.com or ring up on 011-4054 5977 / 9999 022 033 for the same.
ReplyDeleteThank you for sharing such great information. It is informative, can you help me in finding out more detail on Tax Saving, i am interested and would like to know more about this field and wanted to understand the basics of Best Tax Saving Plans
ReplyDelete