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Wednesday, April 17, 2013

How to earn the most from Bank FDs & savings accounts

Many individuals are waking up to the charm of humble bank deposits. According to investment consultants, several investors, especially those in the lower tax slabs, have started to find the higher interest rates of 6 to 7% offered by some banks on saving bank accounts quite attractive. Sweep in facility, which allows customers to convert the surplus money in savings account above a certain limit into fixed deposits, offered by some banks, is also a major draw. One can earn as much as 6.5-8.5% on fixed deposits of varying tenure with banks.

These deposits have started attracting investors after ultra short term bond funds (USTB), a hot destination to park idle surpluses until a year ago, lost their charm after the finance minister increased the dividend distribution tax on debt funds and took away the tax advantage enjoyed by these funds. Investment experts also believe that these funds will offer only around 8% in the coming months.

"It makes sense for individuals in the 10% and 20% income tax bracket to park their funds in traditional avenues such as short-term fixed deposits, or saving bank accounts offering sweep in fixed deposit option," says Madan Mohan, chief counsellor,, a financial literacy and counselling firm.

He also adds that those in the higher tax slab too can consider investing in traditional deposit as the tax rates are almost similar. Interest on saving bank account is added to individual's income and taxed at the rate applicable to the individual.

This means if you are in the 30% tax bracket, you will pay atax of 30.9% on the interest from your savings bank account above Rs 10,000. On the other hand, DDT on debt funds (which includes both liquid and USTB funds) has been hiked in the last Budget and now stands at 28.33%. The new rate will be applicable from June 1. This change means, for the 10% (effective rate of 10.3%) and 20% (20.6%) tax bracket, a bank deposit will work out better in the coming days.


Banks such as Yes BankBSE 1.16 %, Kotak BankBSE 0.47 % and Ratnakar Bank are offering 6-7 % interest on the balance in saving bank account. However, most banks offer only 4.5% on their savings bank account. If you don't want to go through the hassle of opening a savings bank account with another bank, please check whether your bank offers sweep in facility, which automatically converts the surplus funds on savings bank account above a certain limit into fixed deposit.

For example, when the balance in your savings bank account crosses a pre-determined threshold, say, Rs 25000, a fixed deposit is made with the extra money. Tenure of these fixed deposits may vary between 180 days and one year. You are free to move out of this fixed deposit any time. If you withdraw money from this bank account, the fixed deposit is broken or 'sweeped out' and you are paid an interest at the rate of a fixed deposit for which your money was kept with the bank.

For example, if the money remains in the bank for three months, you will get interest for three months at the rate equal to a three-month fixed deposit. The biggest advantage of this facility is you need not have to do anything to earn that extra buck. Though such facilities make the idle funds work hard, everybody doesn't prefer it.

"The only problem with these accounts is that they come with an ATM or debit card," points out Mukund Seshadri, founder partner, MSV Financial Planners. He says many individuals won't be able to resist the temptations and end up spending the money. He recommends short-term bank fixed deposits to park money.

"But the bigger problem with fixed deposits is that you have to choose the term. Sometimes you cannot foresee when you will get the opportunity to deploy your money," says Nikhil Kothari, director and chief financial planner, Etica Wealth Management. In such circumstances, a fixed deposit may not be the best option.

It is better to compare the rate of return on debt mutual funds and fixed deposits before parking your money, he adds. USTB funds gave 0.92% returns as a category in the last one month-ended April 9, according to Value Research, a mutual fund tracking entity. This translates into an annualised pre-tax return of 11.61%.

The higher return is mainly due to the spike in yields towards the end of the financial year, say experts and add that these funds are unlikely to offer similar returns in the coming months. One can expect around 8% annualized return from a USTB even if he parks the money for a short term, say, a month or two.

But the rates on fixed deposits of less than 90 days are far lower - around 5 to 6.5%. In such circumstances, when you are not sure of time you want to park your idle money and you do not have a high paying saving bank account, you can consider the mutual funds, especially when you are in 20% and 30% tax bracket. 
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