Is this the right time to book Recurring Deposits (RDs) ?

If ever there was a right time to book Recurring Deposits (RDs), it has to be right now.

New Kisan Vikas Patra KVP 2014 Vs other Debt based investments

Kisan Vikas Patra (KVP) has been in news off late considering that it has been revamped and relaunched by the government with some seemingly attractive features...but is it good enough? Have a look at the comparison between the revamped KVP and other commonly available investment tools...

10 most common Mutual Fund Myths

Mutual Funds are just the right solution for investors ready to take reasonable risk and do not have time to analyse and dissect organisation data. Each one of us will probably touch Mutual Funds at some point of our financial investment cycle. Here are the 10 most common myths surrounding Mutual Funds that you must be aware of .. read on...

Tax on Savings Account interest Sec 80TTA

Savings Bank Account is the most common account for individuals. When you have money in bank savings account, your money earns interest. What about taxes on this earned interest income? 

Method of Accounting on FD interest : On accrual or on receipt ?

Every penny earned as interest on your Fixed or Recurring Deposit is taxable. Most banks will pay quarterly interest on your Fixed Deposits. This interest will keep compounding. An interesting situation arises when you get into a multi year Fixed Deposit. In such cases, you really should understand what are the options to pay taxes - should you pay the interest accrued in every financial year OR should you wait for the FD to mature. The choice is yours. This post tries to explain the two methods of accounting – mercantile(accrual) and cash.

Fixed Deposits Vs Recurring Deposits

Fixed Deposits and Recurring Deposits are two most commonly leveraged debt based investments used by 90% of the investors in India and abroad. Off late, many of my followers have asked me various questions pertaining to the benefits of investing in either of them and what they should choose and why. So, this post is for all of them.

Fixed Deposits vs Debt based Mutual Funds

The question of Debt Mutual Funds verses Fixed Deposits has been going on for a long time. Which one serves better for the conservative investor? In the minds of most investors, debt funds are a direct alternative and competitor for bank fixed deposits. This is a fair comparison, as the two serve the same purpose in anyone's investment portfolio. However, there are some crucial differences and it's important that investors should understand these.

Form 15G and Form 15H

Background
As per the current TDS rules, if the interest income of an individual / HUF exceeds Rs 10,000 in a year, 10% tax will be deducted at source by the financial institution.
If the investor has not furnished his PAN details, the TDS rate will be higher at 20%.
However, in specific scenarios, Form 15G and 15H can be submitted to give a declaration to the bank not to deduct this tax at source. Check your eligibility to apply for TDS exemption, and if eligible, do not miss out.

What are National Savings Certificate (NSC)

About National Savings Certificate (NSC)
National Savings Certificate (NSC) is a fixed income/debt long term investment option offered by the Indian Government through postal department.
National Savings Certificate, popularly known as NSC, is a time-tested tax saving instrument that combines adequate returns with high safety, in fact safety sometimes overshadows the returns potential. NSCs are an instrument for facilitating long-term savings. A large chunk of middle class families use NSCs for saving on their tax, getting double benefits. They not only save tax on their hard-earned income but also make an investment which are sure to give good and safe returns.

5 Year Tax Saving Fixed Deposit (FD) under Section 80C

We studied in detail about Bank Fixed Deposits (Bank FDs) and the tax implications arising out of the interest earned through Fixed Deposits in a few of our earlier posts:

1. Ladder your Fixed Deposits

2. Know more about Company Fixed Deposits

3. Are you paying TAX on your FD interest

There is one very interesting aspect of Fixed Deposits which is worth mentioning as a separate post. So, i thought i would share that with all of you.

As per the Section 80C of the Income Tax Laws of India, we can do investments of up to Rs. 1.5 Lacs (Rs. 150,000 only) which would help us save taxes on an equal proportion of our salary. While there are various commonly known options to invest and save taxes under Section 80C, one of the option which is not very commonly known for Section 80C investments is 5 year Fixed Deposits.

Are you paying TAX on your FD interest

As you approach Financial Freedom, you would realize that the world of money brings its own challenges. Someone once asked me : "There are 2 different sets of money problems in the world - One set comes with having no money and the other set of problems come with having a lot of money. Which one do you prefer?". I chose the latter.

Most of us who are still stuck in our rat race may have never realized that we are earning interest through various bank Fixed Deposits and even if we are earning a single rupee of interest, we are liable to include that as our taxable income and pay tax on the same. This might not seem to be a big issue while we are in the rat race because the amount of interest is not significantly high and you may feel that your bank is anyway deducting tax at source, but once you start dealing with millions of rupees of interest, you got to take a re-look at your entire approach.

While you would see comprehensive details around Fixed Deposits in the upcoming book "From Rat Race to Financial Freedom", let me give you a quick summary.

Fixed Deposits (FDs) are one of the most popular and traditional debt instruments. They are much more popular than other debt saving instruments like Provident Fund, Post Office Deposits etc because of the high interest rate and liquidity that these deposits offer. But so often, we fail to realize the tax implications of the interest earned through such deposits. Whether you are financially free or not, it pays to understand the tax implications arising out of Fixed Deposits.

I would try to keep these tax rules as simple bullets so that it is easy to understand and follow. so, here we go...

1. Every rupee that you earn through Fixed Deposits is taxable. Yes, every single rupee. Do not get confused if you have heard something like a interest limit of Rs. 10,000.

2. The income through FD interest is added to your total income under the header "Income from other sources" and then taxed as per the income slab you are in, for that specific financial year.

3. 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.

4. Tax Deducted at Source (TDS) is deducted by the banks on your Fixed deposit interests if the interest amount exceeds Rs 10000 from one or through multiple investments put together.

5. If you think that your total income does not fall under the tax bracket, then you need to submit Form 15G (non senior citizens) and Form 15H (for senior citizens) which instructs the bank not to deduct any tax at source.

6. These forms (Form 15G and Form 15H) have to be submitted every year to avoid TDS, if applicable. The reason is that your tax bracket may have changed from one year to another.

7. Even FDs in name of the minor attract TDS, if the interest exceeds the limit of Rs. 10,000.

8. The TDS deducted by the bank would be at a fixed rate of 10% (if you have your PAN no. registered with the bank) or at 20% (if your PAN Number is not registered). At the end of the financial year, bank will also issue you a tax certificate mentioning the tax it has deducted at source(Form 16A).

9. If you fall in a different tax bracket - lets say 20% or 30%, you would have to incorporate that as a part of your income tax returns that you are filing for that financial year.

10. The NRI's, who earn interest on their NRO's account, are subject to 30% TDS

11. Since TDS threshold of Rs.10,000 interest is calculated at the branch level, you can avoid TDS by splitting your FDs across multiple bank branches OR by submitting Form 15G/15H OR by opening a FD in someone else's name, but all these techniques are just delaying the inevitable. You are liable to pay your tax on every single rupee you earned as interest on FD during the year. In all such cases, you will have to pay tax and show the same at the time of filing your income tax return.

I have tried to cover as much around Fixed Deposit taxation. Do feel free to leave a comment if you need any clarifications.

Cheers

Manoj Arora

Know more about Company Fixed Deposits

What are company fixed deposits?

Fixed Deposits in companies that earn a fixed rate of return over a period of time are called Company Fixed Deposits. Financial institutions and Non-Banking Finance Companies (NBFCs) also accept such deposits. Deposits thus mobilized are governed by the Companies Act under Section 58A.

How are they different from Company Equity?

when you purchase a Company Equity (shares), you become a part of the company and share the profit and loss of a company depending on the company performance. Unlike being a shareholder of a company, here you are loaning a fixed amount to a company for a fixed tenure so that they can go ahead with their business . investments. You expect a fixed return irrespective of the company performance.

How are they different from Bank Fixed Deposits?

Company Fixed Deposits are done directly with companies and not with intermediate banking institutions. Since you are directly depositing your money with the company, you have more risk and also you get more returns.

Why to invest in Company Fixed Deposits?

a) Company fixed deposits will give you a higher return than comparative bank fixed deposits. This is because of the additional risk. e.g. Shriram Transport Finance FD was offering 12% CAGR during August 2012 when the maximum FD return available from a Bank FD was 9.5%.

b) You can invest for a shorter lock in period like 6 months.

c) Company Fixed Deposits are non transferable that means there is no fear of FD receipt being stolen. In case it falls into wrong hands ,it cannot be misused. The FD holder in such a case should write to the company which shall issue duplicate deposit receipt upon execution of an indemnity and cancel the previous one. 

d) No Income Tax is deducted at source if the interest income is up to Rs 5,000 in one financial year. Investment can be spread in more than one company, so that interest from one company does not exceed Rs. 5,000

 

What are the risks associated with Company Fixed Deposits?

a) These deposits are unsecured, i.e., if the company defaults, the investor cannot sell the documents to recover his capital, thus making them a risky investment option.

b) It is difficult to choose the right Fixed Deposit in the absence of a 'rating'. This is because apart from NBFCs and housing finance companies, other companies need not go for a rating for their fixed deposits.

c) Company fixed deposits have higher risk than bank fixed deposits because these type of deposits are unsecured, if the company goes bust you will lose your money, and unlike banks, they don’t have any backing of the RBI. RBI does not rate company fixed deposits, and in case of default by the company – RBI is not going to back them in any way.

d) Company fixed deposits may be unsecured debt, which means there is no underlying collateral, and in case of default, you won’t get the funds back by selling off your documents.

How to chose a Company for a Fixed Deposit?

a) Do look at the financials of the companies. The company must be making profits and paying dividends year after year.

b) If the company is posting sustained fall in revenues and profits, it is a cause for concern. Simply avoid companies that are making losses

c) You will be better off looking at taxes and dividends paid by the company. Since these two are cash expenditures, paid to outsiders such as government and non-promoter shareholders, there is little accounting jugglery possible here. A sustained increase in taxes paid and dividends indicates that company's business is doing well. If you can do some number crunching, do look at the interest coverage ratio - just divide 'earnings before interest and tax' by the interest paid by the company. Higher the number, the better it is. You can also look at the debt-equity ratio - total debt divided by shareholder funds. Lower the number, the better it is.

d) Look for a good rating on the deposit scheme wherever available.

Other important notes on Company Fixed Deposits

a) Company fixed deposits are rated by Rating Agencies. The rating agencies hand out ratings to the particular offering, and that can help you make a decision. For example, The Shriram Transport Finance FD scheme was rated tAA (investment grade) by Fitch. These ratings can help raise flags if any offering is rated low, and you can possibly avoid such fixed deposits.

b) Today, investors have many such options like Ansal Housing, Apollo Hospitals, Unitech, Bilcare, Godrej Properties and Unitech. Typically, one can earn around 9-12% from these company fixed deposits.

c) In case of companies listed on stock exchanges, you can get yearly and quarterly numbers of these companies on websites of the exchanges.You can get most of the information about a company when you go to your securities account or visit other common websites like http://www.nseindia.com/ or http://www.moneycontrol.com

d) Company fixed deposits are not always unsecured debt. In some cases, they issue secure debt as well.

Like most investing decisions, whether you invest in these things or not, and how much money you do will depend on your particular circumstances. If you prefer safety over everything else, then it is best to leave these things alone. If you have a moderate risk appetite then you might as well try investing money with some of the better known companies.

A beginner in this field may be lost in the numbers game. Hence it is better to stick with companies that are accepting fixed deposits for a long period of time. A long track record surely offers some comfort.

An extra 1 to 2 % of interest earned through thoughtful investment in a consistent manner in company fixed deposits can go a long way in fast pacing your financial freedom. The reason for that is simple. There is an amazing power in compounding.

Cheers

Manoj Arora

Related Links :

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Ladder your Fixed Deposits

Ladder your Fixed Deposits

What is a Fixed Deposit

(Fixed Deposits) FDs are the deposits that are repayable on fixed maturity date along with the principal and agreed interest rate for the period. Banks generally pay higher interest rates on FDs than the savings bank account, but may also charge you penalty in case of pre mature withdrawal.

What is the issue with doing Fixed Deposits

We all know that the interest rate on Fixed Deposits keep varying over time. While that is true with most investments, we must have a strategy to make sure that we get an almost consistent rate of return so that our income from our corpus is not impacted heavily because of change in interest rates.

How do we ensure consistent returns year on year from FDs

We can make sure that we get a consistent stream of income from Fixed Deposits by leveraging a concept of Laddering of Fixed Deposits

What is Laddering of FDs

Laddering is a process by which an annual stream of FDs is created for a long period. Let us take an example. If you create a stream of 5-6 FDs each year (one FD every 2 months interval), and do this for 5 years and after the 6th year, when they start maturing, you can re-invest them at the prevalent market deposit rates. This makes sure that your rate of return from FDs is reasonably consistent.

As a long term investment, Laddering will give you an average return and help you prevent your corpus from maturing at the lowest interest rate cycle. This concept of laddering applied to FDs is very similar to the concept of SIP (Systematic Investment Plans) applied to mutual funds or stocks.

The book "From Rat Race to Financial Freedom" will talk in detail about Fixed Deposits and how is this debt based investment tool different from other investment tools - its advantages and disadvantages

Happy investing

Cheers

Manoj Arora