The recent deregulation of savings account interest rates was soon followed by announcements of rate increases by several banks. Customers can now earn up to six per cent return annually on idle cash in their bank accounts. Should one stop considering any other option to park short-term funds?
The alternatives being compared are: Post office (PO) savings accounts, short-term fixed deposits (FDs, with tenures of 7-60 days), and liquid plus and ultra short-term debt funds. In terms of returns, these would give one per cent, four per cent (raised from 3.5 per cent last week), 3.75-7 per cent and 8.67 per cent, respectively, according to Value Research, an online mutual fund comparison portal.
Kotak Mahindra and IndusInd are giving 5.5 per cent on account balances less than Rs 1 lakh and six per cent on balances exceeding Rs 1 lakh annually. YES Bank is giving a flat six per cent annually on any amount parked in savings accounts.
Nirav Panchmatia, founder and director, AUM financial advisors, says: "Despite the deregulation of savings account interest rates and high rates offered by FDs, returns from debt funds continue to be more attractive on a post-tax basis."
The interest earned from savings accounts — in post office, banks as well as short-term FDs — is added to your income and taxed according to slab, at 30 per cent if you fall in the highest tax bracket. Returns from liquid funds, if you opt for the dividend payout option, are net of distribution tax, levied at 13.5 per cent (borne by the fund house). Otherwise, capital gains on debt funds are taxed at 10 per cent and 20 per cent, with and without indexation, respectively.
However, the tax advantage may not be reason enough for an individual to give preference to debt. "Typical liquid/liquid-plus funds' investors are savvy and high networth individuals. In comparison, savings account customers are small savers and would give priority to convenience," says Shuja Siddiqui, vice-president & head (wealth advisory), Purple Wealth Management, Motilal Oswal.
A savings account enjoys maximum liquidity. In emergencies, customers can withdraw cash from automated teller machines whenever and wherever they wish. This does not apply to other instruments. For instance, in case of debt funds, if a redemption request is put before 3 pm on any day, the funds would be transferred the next day. If it is put in after 3 pm, the request is processed the next day and the funds are credited the day after. For short-term deposits, the funds would be accessible only after two-three working days of putting a request to break an FD.
|HOW THEY COMPARE|
|Returns (%)||Taxation||Withdrawal/redemption time|
|4-6||Added to income;
taxed as per slab
|4||Added to income;
taxed as per slab
only from post offices
|3.75-7||Tax deducted at
source as per slab
|8.67*||Dividend taxed at 13.5%;
borne by fund houses
|* According to Value Research|
Bank accounts have an advantage over postal accounts even in terms of facilities like internet banking, credit or debit cards, purchase of foreign exchange and so on. So, bank customers have little incentive for shifting to post office savings accounts. The reverse, too, is improbable, according to Malhar Majumder, a certified financial planner. "The minimum balance requirement and charges levied by private sector banks that have raised the savings rates currently will be a deterrent for PO customers, usually maintaining small balances."
The returns from debt instruments may soon start falling, as expectations of a reversal in the interest rate cycle are rife. And, when that happens, with the mandatory four per cent return requirement being done away with, savings account rates can dip even beyond this. Yet, irrespective of returns offered, Majumder feels that from a financial planning viewpoint, individuals should maintain a balance equivalent to three-six months' expenses in a savings account for contingency planning. Here, liquidity must gain prominence over returns. Excess funds, possibly attached to short-term goals, say, with an investment horizon of three months to a year, can be deployed in either short-term deposits or debt funds.