Is it time to get locked in?

Ajay Thakkar, 32, a Mumbai-based businessman, is wondering whether to invest in a bank fixed deposit (FD) now or wait for some more time. Since he is sitting on idle cash, he wants to quickly invest the money, preferably in a debt instrument, as equities are not inspiring much confidence in him.

If Thakkar locks in the money in a five-year FD now, he will get tax benefits under Section 80C for this financial year as well. However, a lesser tenure will not get him tax benefits.

M Narendra, chairman and managing director, Indian Overseas Bank, advises investors to get locked in FD, as interest rates are at peak. "It may get difficult to sustain such rates in the near future. In the coming mid-quarterly review, any change in the CRR (cash reserve ratio) could affect the bank's deposit rate, depending on their liquidity position. In addition, inflation figures and oil prices are high, too," he added.
 

COMPARING RETURNS Fixed deposit interest rates up to Rs 15 lakh as on February 29, 2012 (%)
Nationalised banks	1-year returns	3-year  returns	returns above 5 years
Axis bank	9.25	9.25	8.50
HDFC bank	7.25	9.25	8.25
ICICI bank	8.25	9.25	8.75
IDBI bank	9.25	9.50	9.50
Kotak mahindra bank	9.50	9.25	9.00
SBI	9.25	9.25	9.25
Source: Apnapaisa.com

The table indicates the post-tax returns given by a five-year bank FD are close to 6.4 per cent, compared to 5.8 per cent given by an NSC (National Saving Certificate) for the same tenure. The post-tax returns have been calculated for an investor in the 30.9 per cent tax bracket.

Recently, the State Bank of India hiked its short-term deposit rates by 175-200 basis points above card rates. From March 1, it will pay nine per cent a year for fresh deposits between Rs 15 lakh and Rs 1 crore. This rate is applicable for deposits up to 180 days.
 

A LOOK AT THE OPTIONS These instruments differ in their returns and tenures
Instrument	Section	Taxable / tax-free	Tenure	Pre-tax returns	Post-tax returns
PPF	80C	Tax-free	15.00	8.60	8.60
EPF	80C	Taxable	-	9.50	6.50
NSC	80C	Taxable	41039.00	8.4/8.7	5.8/6.01
*Bank FDs	80C	Taxable	5.00	9.25	6.40
Income  Funds	10% without indexation 20% with it	Taxable	1.00	12.90	11.61
** FMPs	same as above	Taxable	1.00	10.56	9.50
Tax is calculated for individuals in 30.9% tax bracket.  For one-year returns of FMPs and income funds-10% without indexation for post-tax returns *Bank FDs of less than five years are taxable and do not get 80C benefits ** FMPs of slightly over a year earn double indexation benefits

Banks are expecting a CRR cut in the forthcoming mid-term review. Hence, experts opine interest rates may not remain this high once the cut takes place.

"A CRR cut is expected because it will help us release bank's liquidity pressure. And, once the lending rates start falling, it is natural for deposit rates to come down, too, because it's important we maintain our margins as well," says S C Kalia, executive director, Union Bank of India.

The table shows PPF (Public Provident Fund) gets you the highest returns as income and is tax-free as well. But one needs to consider the liquidity and tenure of the instrument. Fixed deposits. on the other hand, give liquidity and comparatively better post-tax returns, too, in a decent tenure of five years.

FDs, being highly liquid instruments, are best suited for long-term goals. And, if there is an urgent requirement of cash, one can always withdraw it before the deposit matures. Banks do penalise customers for withdrawal in the interim, but FDs always come handy, especially if one hasn't arranged for a contingency fund.

A scenario like today's provides good investment opportunities for senior citizens who tend to earn at least 25-50 basis points more and enjoy a higher tax exemption limit. too. Simultaneously, income funds and FMPs (fixed maturity plans) also perform well in these situations.

"From a taxation point of view, individuals in the lower tax brackets get more advantage from the high yields offered on bank deposits. Individuals in the higher tax bracket should opt for FMPs, as these don't affect net earnings. Still, deposits get an edge, as they offer fixed rates," says Rajiv Goel, who runs Bombay Capital Services.