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FD rates drop, move to debt funds
September 6, 2012

SBI has decided to lower its rates on fixed deposits across tenures. This only makes debt funds that much more attractive in terms of returns and tax treatment.


Author : iFAST Content Team



 FD rates drop, move to debt funds

Alright investors. The fixed deposit party is coming to an end.

State Bank of India (SBI) yesterday announced that it would reduce term deposit rates by 50-100 basis points (100 bps = 1%) across tenures. This will come into effect from September 7. Once SBI makes such a move, you can expect all other nationalized banks to follow suit.

This drop in rates makes fixed deposits pretty unattractive after the tax impact is taken into account. We give an example to show you how tax impacts your returns.

The tax effect on term deposits

Amount  invested (Rs)

Tax slab (%)

Interest @9% p.a. (Rs)

Net interest earned (Rs)

Post-tax return (%)

100000

10

9000

9000– 900 = 8100

8.1

100000

20

9000

9000 – 1800 = 7200

7.2

100000

30

9000

9000 – 2700 = 6300

6.3

The rates now offered by SBI are in the range from 6.50% to 8.50%. You could do better with a debt fund where even the tax treatment is more preferential.

Returns on debt funds are subject to capital gains treatment. The short-term capital gain in an income fund is added to the income and taxed according to slabs. In this case, the taxation is similar to that of bank deposits. Hence we recommend that you hold your investment for over a year, when long-term capital gains sets in. Long-term capital gains from debt funds (investments held for more than one year), are subject to either 10% flat capital gains tax or 20% after indexation. 

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