Breaking the Old Fixed Deposits

Bank fixed deposit rates have really gone up over the last 9 months. It has moved northwards by at least a 2% for a 2 year FD.

Interest rates are still on the rise and with inflation not coming under control, it is expected that the RBI will continue to focus on increasing its rates in the coming policy reviews.

This will have an negative impact on the growth in the Indian Economy.

While that is what the future will hold, a lot of us would have invested in fixed deposits with banks because of guaranteed returns as well safety of deposits. However those would have been at much lower rates than what is the prevailing today.

So when does it make sense to break open the old deposits and invest in the new ones?

There are some costs that you incur when you break your fixed deposit as under which you need to take into consideration.

1. The tenure which you had initially put in your money for is no longer valid. You will earn the interest on the tenure in which you are breaking up your deposit ( In an increasing interest rate scenario, this may actually turn out to be positive)
2. One may need to be a penalty of 1-2% on the interest earned since the bank is losing a fixed guaranteed deposit in its kitty.

So when does it make sense for you to break your deposits?

1. Evaluate the costs with the increased rates over the ENTIRE period of the deposit.
2. Usually breaking a new deposit when the tenure is quite long- say 2-5 yr may actually make more sense.

Go ahead, reevaluate your portfolio of fixed deposits and fix in the higher returns!! Every % increase makes a big difference!

Happy investing..

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Fixed deposits-- When to pay Tax

When one invests in fixed deposits, the money is received by us only at the time of maturity. Maturity can be anytime and is dependent on the time horizon of your deposit. A lot of times this maybe more than 1 years.

So, I was recently in a situation where i needed to answer when the tax on the interest earned is payed. I was under the understanding that it is payable at maturity. However, that is NOT TRUE.

The interest earned is liable for tax in the same financial year. A lot of times banks deduct TDS at 10% every year while they make the calculation on the interest earned by you on your deposits.

But the rule is simple, the interest needs to be shown as income and income tax payed against it. (For people who are below the 10% income tax bracket, like housewives, you can read the earlier post on how you can avoid getting the banks to charge TDS and then avoid the hassle of claiming tax back from the IT dept by reading http://simplefinancialsense.blogspot.com/2010/04/fixed-deposits-and-tax-deducted-at.html)

The banks also will send you a TDS certificate which you can use to offset your tax liability when you fill in your returns.

Ensure that you correctly show your income to avoid getting into hassles later on.

Happy Investing

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Fixed Deposits and Tax Deducted at Source( TDS)

Investing is important- however understanding rules and keeping paperwork in order is even MORE important.

 Today I will talk about a rule on TDS on Fixed deposits.

The rule is that if the interest earned is > 10,000 Rs per annum, then TDS will be cut. and this will be at a rate of 10%.

So how do we try and avoid TDS?

1. Ensure that if your income is below the min taxable income ( housewives etc) please use the form 15G and submit it at the branch to avoid TDS impact.
2. TDS is calculated at the branch level- which means that if you have earned interest >10,000 at one branch of a any bank then TDS will be cut. So the option of creating FDs in different branch makes sense to do ( especially if you forget to claim usually the TDS amounts)
    While creating your FDs online, choose different branches when the interest amounts > 10,000!!!

here is a link which helps you calculate what is the interest earned on your FD-- Quite a nifty tool on yahoo finance!!
http://www.personalfn.com/yahoo/calc/tax/return1.asp


Another Important aspect is that please submit your PAN when creating your FD. This will avoid TDS at the rate of 30% vs the rate of 10% if PAN is submitted

So , understanding of rules is important.. Understand and then implement.-- every drop counts

Happy investing!!
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Interest Rates heading Northwards!

A couple of banks stopped their low interest rates schemes called "teaser loans" for mortgages. Feb 28th was the last day for the special 8.25% loans from ICICI bank and HDFC ltd.. Actually the expectation in the market was that this would be extended for another couple of months.

So, Why did the banks withdraw these loans?

This has to do with the fact that the RBI has raised the SLR which indicates that the central bank is trying to reduce the liquidity in the system. This is the first action of many that the central bank is expected to take over the next few months.

What this has also done is that it has forced the banks to raise the deposit rates on FDs for investors ( HDFC has raised the rates as of now).

But the trend is up for interest rates.

So what should we be doing now.

1. Get into any fixed loan schemes ( like I did with HDFC for my house loan) if you are planning for any.

2. There should be good opportunities for CD ( Company deposits) which may be coming out.

3. Fixed deposit rates should be heading up so wait for the interest rates-- dont get into long term FDs- five years etc.

4. Look out for debt funds which may be medium term funds--- they should be going up.

5. Some of the rate sensitive industries may be impacted--Autos, real estate -- so buy them with any short term correction-- their demand will not be impacted too much.

Happy investing.

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