There are times when a little bit of planning can lead to a better return as well as savings over a period of time. A similar question now arises with respect to the distribution of the amount between the savings bank account and the fixed deposit because there are now additional benefits that can be claimed by keeping money in the savings bank account. This is a good thing and here is how the benefits stack up for investors as they consider the overall position and the actual distribution.
Basic factor:
The basic factor that is driving the benefit for an investor is the fact that the savings bank account interest upto Rs 10,000 will be allowed as a deduction in the current financial year. This means that interest upto this figure would not be taxed but the interest on fixed deposit would be taxed right from the first rupee. The net interest earned from the fixed deposit has to be considered with the interest on savings bank so that the net figure would be the amount that has to be compared. There are several conditions when the act of keeping some amounts in the savings bank would or would not be useful and here is a look at several of them.
Interest rates:
For the overall situation to be beneficial there has to be a proper comparison of the interest rates that is witnessed in both the areas. Savings bank interest rate has to be higher at the end of the day after taxes so the individual would need to earn a higher interest rate of 6 per cent or 7 per cent that is offered by some of the bank to be able to get a higher amount of benefit on the overall scale. This would not be likely or possible under the 4 per cent figure that might be earned by them. On the other hand the fixed deposit interest rate also has to be lower so if the rate is high like 8 or 8.5 per cent then it is likely that the benefit would not be reaped. It would have to be something lower for the individual to see how they can have a better net effect. If these conditions are not present then fixed deposits will remain the better choice.
Tax rates:
Another condition that will have to be present in order for the fixed deposit net interest to be lower than the savings bank interest is for the individual to fall under a higher tax slab. So if the person falls under the 30 per cent slab there is a good chance that they would be able to ensure that the net earning for the two areas are closer provided the savings bank interest does not become taxable. For example if the savings bank rate is 6 per cent and the fixed deposit interest rate for the short time period is 7.5 per cent then if the individual falls under the 10 per cent bracket then the situation will most likely not be profitable. On the other hand if they are in the 30 per cent bracket then the net fixed deposit interest earned would be lower and this is the situation that the individual would be targeting.
Small amount:
The individual also has to understand that the benefit that they are talking about if for a small piece of the earnings which is interest upto Rs 10,000. If the amount of earnings is higher then the situation becomes similar for both the areas because the same kind of tax implication would be effective for both the savings bank interest and fixed deposit interest. This would result in a position where there is no need to undertake a lot of effort to try and benefit from the position. On an overall level while the situation is such that the benefit might not seem to be huge this is something that can be utilised to the fullest if there is some planning and effort that is undertaken but the benefits would actually remain limited.
The author can be contacted at arnavpandya@hotmail.com
