Don't let money lie idle in banks

Though the Budget has made interest income up to Rs 10,000 tax-free, invest that for lucrative returns

Now, returns on your savings account have become more lucrative. You can claim an additional deduction of Rs 10,000 worth of interest income on the account.

This will be brought into effect from April 1 (for assessment year 2013-14) by Section 80TTA. The deduction to an individual will, thus, be allowed for interest on deposit in a savings account with either a bank or a co-operative society (engaged in banking) or a post office.

The good part being, there is no cap (on an individual's income) on who can avail this deduction, says Homi Mistry, partner at Deloitte, Haskins and Sells. "You get the deduction of Rs 10,000 or the interest income earned, whichever is lower," he says. However, you cannot claim deduction of such income if derived on behalf of someone else.

"Earlier, there was Section 80L. Under this, one could claim a deduction for interest income of up to Rs 13,000 — Rs 7,000 for savings account, Rs 3,000 for mutual funds and another Rs 3,000. This has been brought back in the form of Section 80TTA," says Mayur Shah, tax director, Ernst & Young.

Bankers feel, at a time when savings accounts rates have been deregulated, this will boost their current account-savings account (Casa) ratio. "Bringing good numbers to Casa is quite challenging this year. The numbers remain subdued. This proposal brings good news. We will capitalise on it and start promoting the bank account as a savings instrument for FY13 very soon," says A K Dutt, executive director, Dena Bank. He expects Dena Bank's Casa to improve 5-10 per cent on a year-on-year basis.

Bankers argue this out with numbers, too. "Customers need not make short-term deposits from savings bank amount; some bank's post-tax returns on deposits may be lower than that of the savings account rate," says Mahesh Balasubramanian, executive vice-president, Kotak Mahindra Bank. Plus, this is an additional option for a risk-averse investor to park funds.

Sample this: You invest in State Bank of India's one-year fixed deposit, which gives a 9.25-per cent return. Say, you are in the highest tax bracket, then your return falls to 6.47 per cent. After the savings rate deregulation, YES Bank pays you a higher seven per cent on the savings account. Even Kotak Mahindra Bank and IndusIndBank pay a minimum of 5.5 per cent and a maximum of six per cent.

Even corporate deposit customers, if invested in well-rated companies, earn a lower rate. Consider this: If you are in the 30-per cent tax bracket, with ICICI Home Finance's one-year deposit, you will earn a 6.3 per cent post-tax return (and nine per cent pre-tax, according to Bluechip India). Mahindra & Mahindra is paying 8.50 per cent for a year, translating into a post-tax return of 6.45 per cent.

Experts fear that in spite of the low returns, people will consider savings account as a tax-saving instrument. "But, you will need a huge balance to avail the real benefit. Plus, this will encourage short-term investments," says Anil Rego of Rights Horizon.

For investments, debt funds would be more tax-efficient and advisable. According to Value Research, short-term debt funds have returned 9.26 per cent in the past year, ultra-short term funds 9.21 per cent and liquid and income funds nearly 8.8 per cent. Long-term capital gains are taxed at 10 per cent without indexation and 20 per cent with it. In the short term, the gains are added to your income and taxed according to slab. Or, parking the funds in Public Provident Fund will also give a higher tax-free 8.6 per cent.

If you have a slightly higher risk appetite, opt for equity-oriented hybrid funds (annual returns = 3.37 per cent) — very tax efficient. These invest 65 per cent in equities and the rest in debt. Equities pump up the returns and the debt component protects against the downside. Also, the fund is exempted from long-term capital gains tax.