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Bank Fixed Deposits Back in Action

A Special Feature- Oct 06

The hike in Fixed Deposits interest rates, with banks offering 8% (and up to 8.5% for senior citizens) have made it an attractive option for investors to invest safely in long term.

Since the past three months, banks are pulling customers by declaring these high fixed-deposit interest rates. Even customers are turning to these options as withdrawing a bank FD on maturity is hassle-free compared to government schemes offering similar returns.

ICICI Bank is paying 8% for 390 days. Federal Bank & Kotak Bank gives same rate on deposits of 300 & 290 days maturity. Centurion Bank of Punjab offers 8% for 365 days.

If the term is increased or decreased by even a few days, these rates are not applicable. e.g. ICICI Bank offers 8% interest for a deposit for 390 days. But above or below 390 days, one shall only earn 6.75% interest

According to an Assocham study, increasing volatility in interest rates, and the availability of other attractive investment avenues has diverted prospective investors away from longer-term deposits schemes since 1998-99. An increasing number of people are opting to invest their money in commercial bank schemes of shorter maturity periods of less than two years.

Apparently, this is a move by banks to capture a bigger share of depositor base. But this rather expensive move by banks may not last long. Banks are planning to review these rates shortly.

Why Bank FDs make sense for investors? In the case of risk-free small savings schemes like National Savings Certificate and the Public Provident Fund, investors placing money in term deposits and planning to take a tax deduction will also have to reconcile to a lock-in period of five years. Unlike in the case of PPF, with a lock in period is 15 years, FDs have shorter lock-in periods. The government notification says that no term deposit can be encashed before five years from the date of investment. The ceiling on investment is Rs. 1 lakh.

The special term rates have blurred the line between fixed deposits and other government investment schemes like National Savings Certificate and the Public Provident Fund. Unlike the schemes with administered interest rates, banks will have pricing freedom. But they can no longer sell term products as one with the flexibility of withdrawals before maturity.

The interest earned on these deposits will attract tax either on an accrual basis or on receipt basis. The Income Tax Act provides exemption from tax being deducted at source on time deposits with banks, co-operative banks and public sector companies if the annual interest earned on these deposits is below Rs 5,000.

Investors also get a flexibility of liquidating their investments in emergency situations. However, they will be eligible for the tax exemption (under section 80 C) only if they keep the deposits till the maturity period. The banks are now waiting for further clarifications whether they can give loans against these deposits.

To read study on Interest Rates Impact on Short Term Deposit Schemes CLICK HERE


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