Banks are looking to raise one-year deposits at 9.75% to meet MF, pension fund redemptions.
The short-term deposit rates have already gone up sharply with banks bustling for deposits of one-year maturity to repay mutual and pension funds. Banks are planning to raise one-year deposits at 9.70-9.75 per cent as against 8.5-8.75 per cent a month ago.
Banker informed that rates have gone up mostly for bulk deposits and might be extended to the retail segment also.
Most of the banks are facing a tight liquidity situation during this period though last year had raised one-year money from the mutual and pension funds at an average cost of 10-11 per cent. This is coming up for redemption now. The deposits accounted for 7-8 per cent of the total aggregate deposits mobilized last year, a banker said.
There had been an increase on the bulk deposit rates in January and February last year too, but for a different reason. In December 2006, after the Reserve Bank of India hiked the cash reserve ratio (CRR) to leash in credit growth, banks had to raise costly money. Last year credit grew by an average 30-32 per cent which was way above the RBI’s estimate of 20-21 per cent.
Apart, in the corporate bond market, banks can raise one-year funds through certificate of deposit at 9.10-9.15 per cent. But dealer’s explained that money raised through certificate of deposits cannot form part of the deposit base.
Some dealers told that the rate war position will continue till the end of February when all the banks are expected to be through with their liquidity provision. Post-February, the position might change as the rates are expected to get moderate.
The aggregate deposit growth for the financial year 2007-08 so far has been higher by 19.5 per cent compared to a growth of 14.2 per cent in 2006-07.
According to Bankers the increased deposit will also trigger demand for investments in government securities to maintain the statutory liquidity requirement. An SLR bond qualifies for the portfolio maintained by banks to meet the statutory liquidity requirement. SLR is the percentage of total deposits banks have to maintain in the form of cash, gold or approved securities. Currently, the minimum SLR is 25 per cent. Another reason for the banks to rush to raise deposits is to boost the balance sheet as the financial year draws to an end. Moreover, there is uncertainty on the liquidity front. Though the system is flushing with liquidity, it is established only in some specific pockets.
Besides, foreign exchange inflows, which used to be a constant source of liquidity for the market, are down to drip following the correction in the Indian equity market and the dollar crunch in the international market following the sub prime crisis.
Monday, February 11, 2008
Friday, February 8, 2008
Bank FDs interest earned is taxable
Did you ever think you might have to pay tax on income you are yet to receive? Yes you have to, and in your favorite instrument - the good old bank fixed deposit - at that.
The tax on the interest earned at the end of a financial year on bank FDs, have to be paid even if the interest will be paid at a later date, or maybe years later. For example you have made an FD of Rs 50,000 for four years. You will have to pay tax on the liable interest for all the financial years it spans, even though the interest amount would come into your hands only at the end of the four-year tenure.
Says Tarun Ghia, chartered accountant, TMG & Associates, "If the tenure of the FD is more than one year, the interest is accrued every year, whether received or not." According to him, one needs to pay tax on the interest increase in advance.
The interest earned on FD is added to the individual's income and taxed according to the slab the individual falls into. In case, you earn interest income of Rs30, 000 in a given year, that amount will be added to your income and taxed accordingly. For a person whose income is above Rs1.25 lakh, the tax would work out to 10%. This will be added to your income each year, even though you haven't yet received the interest in your hands. In fact, interest should be calculated yearly.
The interest earned on FD is also compounded i.e. the FD interest is reinvested at regular intervals - quarterly, half-yearly or yearly. This is a phenomenon that helps grow your money further.
As a result of compounding, Ghia says, "Even if the interest during the entire term of the FD is 8% per annum, the interest for the first year will not be equal to that in the second year because of the cumulative effect."
Also, if the interest on a particular fixed deposit exceeds Rs10,000, tax is deducted at source (TDS), which is applicable per financial year. The bank will compute your interest and will deduct an amount equivalent to the tax, if any, by making adjustments in the FD amount. The TDS certificate or amount can be submitted when you are submitting returns to ensure that tax is not deducted twice on the same income. If the bank has not informed you about the TDS, please enquire with them about it.
The tax on the interest earned at the end of a financial year on bank FDs, have to be paid even if the interest will be paid at a later date, or maybe years later. For example you have made an FD of Rs 50,000 for four years. You will have to pay tax on the liable interest for all the financial years it spans, even though the interest amount would come into your hands only at the end of the four-year tenure.
Says Tarun Ghia, chartered accountant, TMG & Associates, "If the tenure of the FD is more than one year, the interest is accrued every year, whether received or not." According to him, one needs to pay tax on the interest increase in advance.
The interest earned on FD is added to the individual's income and taxed according to the slab the individual falls into. In case, you earn interest income of Rs30, 000 in a given year, that amount will be added to your income and taxed accordingly. For a person whose income is above Rs1.25 lakh, the tax would work out to 10%. This will be added to your income each year, even though you haven't yet received the interest in your hands. In fact, interest should be calculated yearly.
The interest earned on FD is also compounded i.e. the FD interest is reinvested at regular intervals - quarterly, half-yearly or yearly. This is a phenomenon that helps grow your money further.
As a result of compounding, Ghia says, "Even if the interest during the entire term of the FD is 8% per annum, the interest for the first year will not be equal to that in the second year because of the cumulative effect."
Also, if the interest on a particular fixed deposit exceeds Rs10,000, tax is deducted at source (TDS), which is applicable per financial year. The bank will compute your interest and will deduct an amount equivalent to the tax, if any, by making adjustments in the FD amount. The TDS certificate or amount can be submitted when you are submitting returns to ensure that tax is not deducted twice on the same income. If the bank has not informed you about the TDS, please enquire with them about it.
Thursday, February 7, 2008
Tax-saving fixed deposits are becoming popular among investors
People keep searching for the options to save tax. As the March is approaching tax investments have probably become the priority. Generally consider insurance, equity-linked saving schemes (ELSS), PPF to get some tax exemptions. Nowadays five-year tax-saver fixed deposits (FDs) are becoming popular among tax savers.
The government in its Budget 2006 had extended tax benefits to five-year tax-saver deposits. According to the existing provision, you are eligible for exemption on five-year deposits on investments up to Rs 1 lakh. These fixed deposits will not have the option of premature withdrawal and will be locked for a five-year period from the effective policy date. Secondly, these fixed deposits cannot be undertaken as guarantee to secure a loan to meet your liquidity needs.
Also, banks do not give overdraft facility on tax-saver deposits. As this instrument of saving money is special due to its tax-saving status, banks do not extend relationship benefits on the tax-saver FD.
Unlike the accustomed fixed-deposit products, these tax-saver FDs do not have the sweep-in facility. This means, the surplus funds in the savings account will not be automatically invested in this fixed deposit.
Similar to life insurance policies and mutual funds (ELSS), this exemption comes under Section 80 C of the Income Tax Act, 1961. One thing is clear that this five-year bank fixed deposits offer tax benefits when you invest in them. Some industry experts have a view that these five-year tax-saver FDs are better than PPF.
In PPF, your money will be locked for a period of 15 years. A loan can be taken against the PPF account after completion of one year from the end of the financial year of opening of the account and before completion of the fifth year. Moreover there is an option of with drawing the money after completion of 5 years from the end of the year of opening the account. But in this case, a five-year fixed deposit can score over the PPF due to higher lock-in period.
The interest rate on most of these tax-saver deposits range between 8.5-9% p.a. PPF and NSC gets you 8% p.a. However the interest on deposits is tax free in case of PPF. Interest is generally calculated on a quarterly basis and the interest reinvested into the fixed deposit.
Kartik Jhaveri, a certified financial planner and wealth manager with Transcend India explains, as the returns on these deposits are taxable, the net return depends upon the income tax bracket in which you fall. Let us assume that your tax-saver deposit is fetching you a return of 8.5% p.a. Now, if you fall in the 20% income tax bracket then your effective post-tax return would be around 12.4% p.a. This is after taking into account the tax rebate earned as well as tax paid on interest earned.
Though there are various tax-saving alternatives available in the market. But a 5-year fixed deposit is a near risk-free investment. Before signing on the dotted lines study its benefits carefully.
The government in its Budget 2006 had extended tax benefits to five-year tax-saver deposits. According to the existing provision, you are eligible for exemption on five-year deposits on investments up to Rs 1 lakh. These fixed deposits will not have the option of premature withdrawal and will be locked for a five-year period from the effective policy date. Secondly, these fixed deposits cannot be undertaken as guarantee to secure a loan to meet your liquidity needs.
Also, banks do not give overdraft facility on tax-saver deposits. As this instrument of saving money is special due to its tax-saving status, banks do not extend relationship benefits on the tax-saver FD.
Unlike the accustomed fixed-deposit products, these tax-saver FDs do not have the sweep-in facility. This means, the surplus funds in the savings account will not be automatically invested in this fixed deposit.
Similar to life insurance policies and mutual funds (ELSS), this exemption comes under Section 80 C of the Income Tax Act, 1961. One thing is clear that this five-year bank fixed deposits offer tax benefits when you invest in them. Some industry experts have a view that these five-year tax-saver FDs are better than PPF.
In PPF, your money will be locked for a period of 15 years. A loan can be taken against the PPF account after completion of one year from the end of the financial year of opening of the account and before completion of the fifth year. Moreover there is an option of with drawing the money after completion of 5 years from the end of the year of opening the account. But in this case, a five-year fixed deposit can score over the PPF due to higher lock-in period.
The interest rate on most of these tax-saver deposits range between 8.5-9% p.a. PPF and NSC gets you 8% p.a. However the interest on deposits is tax free in case of PPF. Interest is generally calculated on a quarterly basis and the interest reinvested into the fixed deposit.
Kartik Jhaveri, a certified financial planner and wealth manager with Transcend India explains, as the returns on these deposits are taxable, the net return depends upon the income tax bracket in which you fall. Let us assume that your tax-saver deposit is fetching you a return of 8.5% p.a. Now, if you fall in the 20% income tax bracket then your effective post-tax return would be around 12.4% p.a. This is after taking into account the tax rebate earned as well as tax paid on interest earned.
Though there are various tax-saving alternatives available in the market. But a 5-year fixed deposit is a near risk-free investment. Before signing on the dotted lines study its benefits carefully.
Tuesday, February 5, 2008
Bank of Rajasthan increases term deposits interest rates
According to the press release from the Bank of Rajasthan interest rates on term deposits of some maturities has been increased with immediate effect.
Earlier the bank was giving 5.75 per cent on deposits of 91-120 days and 6.5 per cent on deposits of 121-179 days. Now the interest on term deposits of 91-179 days is at 7 per cent.
Earlier the bank was offering rate on deposits of 1-3 years at 9 per cent. Now the bank has increased the rate on deposits of 15-18 months to 9.25 per cent. The press release said senior citizens will be given an additional interest of 0.5 per cent.
Earlier the bank was giving 5.75 per cent on deposits of 91-120 days and 6.5 per cent on deposits of 121-179 days. Now the interest on term deposits of 91-179 days is at 7 per cent.
Earlier the bank was offering rate on deposits of 1-3 years at 9 per cent. Now the bank has increased the rate on deposits of 15-18 months to 9.25 per cent. The press release said senior citizens will be given an additional interest of 0.5 per cent.
Monday, February 4, 2008
FDs and recurring deposits are investors favorite
As there has been widespread fear in the market about melting down of American economy, uncertainty in real estate business and fluctuating stock indices, investors are keeping their investments safe with banks in the form of fixed deposits and recurring deposits. In the past couple of weeks the city banks have seen a growth of around 20 per cent in fixed and recurring deposits.
"Fluctuating market definitely adds to the apprehension of investors as a result people look for safe investments which normally come from bank deposits. Besides, after the recent fall in the stock market we have been witnessing around 20-25 per cent rise regarding fixed deposit inquiries," informed a banker from Nerul on condition of anonymity.
In fact investors also approve for channel zing the funds into bank-deposits as better option seeing the condition of real estate business, on a rollercoaster ride and stock market unpredictable.
"For investing in real estate one requires a huge sum as well it demands lot of paper work, while security market these days is highly unpredictable. Therefore, it's safe to invest with banks for a nominal interest as during such time mutual funds are equally risky," said Anuradha Pillai, a Vashi resident.
In addition to this from major money deposits, investors are also setting apart their regular monthly savings in the form of recurring deposits. "High-end profits are always acceptable but one also needs to check security part of it. Often profit is equivalent to risk factor involved in the investments. Hence, along with major investments for bigger returns, maintaining small monthly saving although for low interest rate is advisable," said Shruti Desai, a Nerul- resident and asst finance manager with a reputed bank. Currently, most of the banks are recording a major rush for short-term fixed deposits instead of long terms.
"More than half of the recent fixed deposits are for a duration of 1-2 years. The sudden fall in the market must have wobbled the investors as a result for a temporary period they must be storing their present savings with banks and would divert it again once the market seems stabilise," added banker.
"Fluctuating market definitely adds to the apprehension of investors as a result people look for safe investments which normally come from bank deposits. Besides, after the recent fall in the stock market we have been witnessing around 20-25 per cent rise regarding fixed deposit inquiries," informed a banker from Nerul on condition of anonymity.
In fact investors also approve for channel zing the funds into bank-deposits as better option seeing the condition of real estate business, on a rollercoaster ride and stock market unpredictable.
"For investing in real estate one requires a huge sum as well it demands lot of paper work, while security market these days is highly unpredictable. Therefore, it's safe to invest with banks for a nominal interest as during such time mutual funds are equally risky," said Anuradha Pillai, a Vashi resident.
In addition to this from major money deposits, investors are also setting apart their regular monthly savings in the form of recurring deposits. "High-end profits are always acceptable but one also needs to check security part of it. Often profit is equivalent to risk factor involved in the investments. Hence, along with major investments for bigger returns, maintaining small monthly saving although for low interest rate is advisable," said Shruti Desai, a Nerul- resident and asst finance manager with a reputed bank. Currently, most of the banks are recording a major rush for short-term fixed deposits instead of long terms.
"More than half of the recent fixed deposits are for a duration of 1-2 years. The sudden fall in the market must have wobbled the investors as a result for a temporary period they must be storing their present savings with banks and would divert it again once the market seems stabilise," added banker.
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