Fixed deposit (FD) rates have increased in the last year. FDs are quite popular among senior citizens. Although FDs are known for their safety and insurance coverage up to ₹5 lakh per account, the post-tax returns may not be as competitive. Yes, if you are getting an interest rate of 7 per cent on a term deposit, it does not mean that you will be getting the same post-tax deductions.
FD rates have increased in one year, but post-tax returns are still below the FY 24 Inflation expectation of 5.4%, according to data shared by FundsIndia.
If we look at the returns on two-year term deposits, HDFC Bank and State Bank of India (SBI) are giving a 7% interest rate, but post-tax returns come out to be 4.95%. ICICI Bank is offering an interest rate of 7.1% on these deposits, but post-tax returns are 5.02%.
View Full Image
On three-year deposits, HDFC Bank, ICICI Bank, and Punjab National Bank (PNB) are giving 7%, but post-tax returns are 5%. SBI offers an interest rate of 6.5% on this tenure, and a post-tax return of 4.63%.
“Traditional fixed deposits (FDs) have their limitations as an investment option in a higher tax bracket. For example, as a 30% tax bracket depositor, we might end up with an effective interest rate of 5.16%, which is lower than the current inflation rate of 5.5%,” said Amit Gupta, MD, SAG Infotech.
Exciting news! Mint is now on WhatsApp Channels. Subscribe today by clicking the link and stay updated with the latest financial insights! Click here
What should investors do?
Investors should consider alternatives like A-rated corporate bonds or debt-based mutual funds for higher yields.
“Explore options like A-rated corporate bonds, which can offer higher annual yields compared to FDs. However, it’s important to be cautious due to the illiquidity and associated risks of corporate bonds,” said Gupta
Debt-based mutual funds and equity arbitrage mutual funds for their tax benefits, even though they don’t guarantee returns, added Amit Gupta
Tax-free bonds offered by public sector organizations, especially beneficial for someone in the highest tax bracket can also be considered as per Gupta.
He added that investors need to be aware that these bonds must be purchased from the secondary market.
It is crucial for investors to understand the challenges of relying solely on FDs for investment, especially those in the higher tax bracket.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
“Exciting news! Mint is now on WhatsApp Channels 🚀 Subscribe today by clicking the link and stay updated with the latest financial insights!” Click here!
Download The Mint News App to get Daily Market Updates.
Updated: 16 Oct 2023, 02:19 PM IST