Rise in fixed deposit rates draws investors

Since the beginning 2008 stock market has seen down fall and inflation rising. With rise in inflation the interest rates on term deposits started showing negative interest. After the Reserve Bank of India move to raise short – term lending rates (repo rates) and mandatory bank deposits with the central bank (CRR) by 50 basis points each to check inflation banks have revised fixed deposit rates because of this the fixed deposits have become flavor of the month. Other wise the stock markets had an edge over fixed deposits, because of the booming stock indices.

Even the government's saving schemes, especially the post office saving schemes, was also having edge over the FDs. The reason behind the limelight of FDs includes the decision to give tax breaks in terms of coverage under Section 80C of the Income Tax Act. Another important factor has been the gradual increase in the interest rates on FDs.

The deposits have been brought on same level with the small savings schemes. Investments in term deposits offering a tax deduction have a lock in period of five years. According to the government notification no term deposit can be encashed before five years from the date of investment. The ceiling on investments is Rs 1 lakh for tax deduction. The interest earned on these deposits will attract tax either on an accrual basis or on receipt basis. If the deposit is made with a joint holder, the tax benefit is given to the first holder.

Under Section 80C the investors have been given the option of fixed deposits to complete their investments. In case of investments in National Savings Certificates (NSC) the return is eight percent and the tenure is six years. However, you can keep the NSCs as security for a loan. The accumulated interest is considered as a further investment and hence, it is also eligible for Section 80C benefits. These investments are totally secured in nature. They constitute a medium term investment opportunity. Although income earned in the form of accrued interest is taxable each year.

Whereas, an investment made in the Public Provident Fund (PPF) is for long-term investors. This investment is also totally secure. The interest earned on this investment is exempted from tax. The deposits are exempt from wealth tax. The rate of interest is not fixed for the entire duration of the investment, but is announced regularly. The interest rate is revised by the government at intervals. The interest rates can be changed in the middle of the investment period. Further, the investment is for a fixed period of 15 years.

The tax aspect needs to be factored in. The interest income from fixed deposits is fully taxable, without the benefit of any deduction in the hands of the receiver, which means that for all those who come under the highest tax bracket, the applicable rate will be 30 percent, plus cess.

Investors prefer fixed deposits only in case the interest rates are high enough. FDs still have a long way to compete with these other investment avenues available to investors. Investors have to take care of certain factors such as interest rates, returns, lock-in periods, liquidity and security, before taking an investment decision.