Tax Saving Fixed Deposits in India

Updated on Feb 27 2011.

Since we’ve had so many posts on bonds and tax saving instruments in the past few days I thought I’d keep the momentum going and write about tax saving fixed deposits in India today.

A tax saving term deposit has a tenure of 5 years, and a lot of banks offer these. They save tax because they reduce your taxable income when you invest in them up to a cap of Rs. 1 lakh, and come under Section 80C.

The interest earned from these fixed deposits is taxable, and tax will deducted at source as applicable.

These term deposits can’t be encashed before the expiry of 5 years, and you can’t pledge them to get any loans also.

Here is a list of some banks which offer these deposits along with the prevailing interest rates applicable as at November 3rd 2010.  If you see any mistakes, want to add any other bank or have anything else to say – please leave a comment.

S.No. Bank Interest Rate
1 Axis Bank 8.25%
2 Allahabad Bank 8.00%
3 Bank of Baroda 8.50%
4 Bank of Maharashtra 8.30%
5 Canara Bank 8.75%
6 Central Bank of India 8.85%
7 HDFC Bank 8.25%
8 ICICI Bank 8.75%
9 IDBI Bank 8.75%
10 Indian Bank ?
11 Indian Overseas Bank 8.10%
12 J&K Bank 8.50%
13 Karur Vysya Bank 9.00%
14 Kotak Bank 9.25%
15 Punjab National Bank 8.50%
16 Punjab and Sind Bank 8.50%
17 South Indian Bank 8.75%
18 State Bank of Hyderabad 8.75%
19 SBI 8.50%
20 State Bank of Travancore 9.00%
21 Syndicate Bank ?
22 UCO Bank 8.00%
23 Union Bank of India 8.50%
24 Vijaya Bank 8.25%
25 City Union Bank 9.50%
26 Indian Bank 9.00%

Click here to see the interest rates comparison on regular fixed deposits.

India’s structural food inflation problem

In August I wondered how many bad monsoons it’ll take for us to realize that we have to tackle food inflation by dealing with issues like irrigation, food storage, distribution, cold storage etc., and not tinkering with interest rates, but it seems that all we needed was a good monsoon to drive home the point.

As I read through the Second Quarter Review of Monetary Policy 2010 – 2011 by Dr. D Subbarao – the concern about inflation, specifically food inflation, and more specifically structural food inflation was quite apparent to me.

The primary food inflation itself has lowered from 21.4% in May 2010 to 15.7% in September 2010 (from very high to still quite high), but what is interesting about this is that the year on year rate in protein based food items such as pulses, milk, eggs, fish and meat still remained at 23.9% in September 2010. These items were at 34% in May 2010.

The report goes on to state that the inflation rate for the protein rich items has not moderated as much as you’d expect with a normal monsoon, and this is partly due to the changing consumption patterns, and “inadequate supply response”.

From the report:

Further, notwithstanding some moderation, food price inflation has remained persistently elevated for over a year now, reflecting in part the structural demand-supply mismatches in several commodities – besides protein sources, oilseeds and vegetables also show this pattern. Given the changing consumption patterns and as yet inadequate supply response, food price inflation is becoming increasingly structural in nature. Further, even as non-food manufacturing inflation has indeed moderated, it still remains above its medium-term trend.

This is quite serious coming from the RBI governor, and coupled with all the noises about opening up FDI in multi – brand retail, – I feel that Indians are finally going to get a glimpse of what shopping in Walmart feels like.

Opening up multi brand retail has always been a tricky issue because of the fear that hundreds of thousands of mom and pop stores will go out of business, and while I personally don’t subscribe to that view –  I can certainly understand where the apprehension is coming from.

A long time ago – as part of my summer training I worked for IFB – the washing machine company, and my boss there told me that when they first heard that the likes of LG and Samsung are coming to India – they were really worried that these giants will drive them out of business, and they’ll be on the roads, but they soon found out that they can compete and even outdo these businesses.

I am sure some of you will also remember the massive scare that computerization brought to the Indian public sector and how everyone was worried that the computer will replace them and they’ll lose their jobs.

India has done well in cautiously opening up it’s economy, and assimilating with the global economy better, and in a world where Venkateshwara Hatcheries buys a European football team – we should be more confident about our abilities, — all the more so when we desperately need the cold storage infrastructure and other expertise that will help us prevent the wastage of lakhs of tons of foodgrains and help us move up from a pathetic rank of 67 out of 85 countries in the Global Hunger Index

Power Grid FPO Numbers

Power Grid FPO is going to open on the 9th November, and close on the 12th November for retail participants. As I wrote earlier, the company did extremely well on listing last time around, so a lot of people must be watching it with keen anticipation. As I was reading through the prospectus – I thought I’d do this post with just some of the key numbers that grabbed my attention.

Power Grid FPO
Power Grid FPO

This Navratna transmitted approximately 363.72 billion units of electricity, representing approximately 47% of all the power generated in India in Fiscal 2010, and was ranked as the world’s third largest transmission utility by World Bank in 2009. Power Grid is the only listed power transmission company in India, and has a lot of activity going on with 68 power transmission projects at various stages of implementation. They spent Rs. 291.2 billion towards investment in transmission projects during the government’s 11th Five Year Plan, so you can see that we are talking about huge numbers here.

The tariffs for the transmission projects are determined by the Central Electricity Regulatory Commission and are based on a cost plus tariff based system and provide a return on equity of 15.5% on pre – tax basis.

They have generated massive positive cash from operations in the past, and their profits have been on the rise as well. The EPS was Rs. 4.85 in 2010, and Rs. 3.22 for the six months ended this fiscal. The year has been good for Power Grid as the PAT was up 41.62% at Rs. 4.59 billion for the September 2010 quarter.

While the company primarily generates its revenues from power transmission – they do some consulting work for other companies, and are also present in the Telecom sector.

The Power Grid FPO pricing has not been declared yet, and I will update this post as soon as the pricing details are out.

Click here to read how Power Grid performed since its IPO listing.

Investing for beginners: Tax implications on various debt instruments

As part of our investing for beginners series we looked at volatility last week, so I thought I’d take this week to look at debt instruments and more specifically – the different type of taxes that a debt instrument may attract, so when a new debt offer comes you know what questions to ask with respect to tax.

Very briefly, these are the questions about tax you should ask:

  1. Do I get a reduction in my taxable income in the Rs. 1 lakh limit?
  2. Do I get any additional reduction in my taxable income over and above the Rs. 1 lakh?
  3. Is the interest income tax free?
  4. Will TDS be deducted from the interest income of this instrument?
  5. Even if TDS is not deducted – will I have to pay tax on the interest earned from this debt instrument?
  6. If I sell this on listing and earn a profit will I have to pay capital gains tax on this?
  7. What is the tax that I pay on the maturity of this instrument?

Tax implications of different debt instruments.

Do I get a reduction in my taxable income in the Rs. 1 lakh limit (Section 80c)?

When it comes to taxes – one of the first questions on everyone’s mind is if this instrument is eligible under the 1 lakh limit. So, you need to check that first – will investing in this debt instrument make you eligible for reducing your taxable income under Section 80C or the 1 lakh limit.

An example of this is tax saving fixed deposits that make you eligible for deduction under this section with a cap of Rs. 1 lakh.

Do I get any additional reduction in my taxable income over and above the Rs. 1 lakh (Section 80CCF)?

The recent infrastructure bonds reduced your tax liability by reducing your taxable income over and above the 1 lakh limit mentioned in the earlier point.

What this means is if you invest in the bonds – your taxable income will be reduced by a maximum of that much amount with a cap of Rs. 20,000, and consequently the tax you pay will get reduced.

Is the interest income tax free?

Bond issuers will give you an option of getting interest paid semi-annually, annually or at any other interval. Since this is your income this will be added to your income and you will have to pay tax on this. Unless otherwise stated, the interest is taxable.

I don’t think there is any instrument currently offered that pays you tax free interest.

Will there be TDS on the interest income of this instrument?

Some instruments will have interest payments on which tax will be deducted at source, whereas others will pay you the full sum, and then you’ll have to declare your interest income at the time of filing returns.

Most fixed deposits with banks will attract TDS if you reach a certain level.

Even if TDS is not deducted – will I have to pay tax on the interest earned from this debt instrument?

This ties back the last point where someone may say that there is no TDS on this particular instrument, but then you need to ask if the interest is still taxable or not.

A debt instrument that is issued in dematerialized format and listed on a stock exchange doesn’t get tax deducted on source on it, but that doesn’t mean that there is no tax on it – just that there will be no TDS on it. You will still need to add this interest income to your other income and pay the tax. The SBI retail bonds are an example of this.

If I sell this on listing and earn a profit will I have to pay capital gains tax on this?

You are seeing bonds that list on the stock exchange, and there may be a situation when these bonds list at a premium, and if you sell them at that time you will have to pay capital gains tax. So, if you bought the SBI retail bonds which then list at a premium and you decide to sell them then you will have to pay tax on capital gains at the applicable rates.

What is the tax that I pay on the maturity of this instrument?

Some instruments reinvest the interest and then pay a lump-sum at the end of the maturity period. So the question is whether this lump-sum will be taxable at the end of the period or not.

The Public Provident Fund (PPF) is an example of a product where the sum you get at maturity is not taxable whereas the National Savings Certificate (NSC) is an example of a product where the sum received at the end of the term is in fact taxable.

How can I know if a particular instrument offers a tax  benefit or not?

Look outside your window, and if you don’t see the issuer shouting a particular benefit at the top of their lungs – that benefit is not available in that instrument.

So if a issuer says you will get 80C benefits but is silent about TDS then in all likelihood you will have to pay TDS.

Keep these points in mind when evaluating the tax benefits of any debt instrument, and you will be better equipped to take a final decision on whether the instrument suits you or not.