Since FD rates are expected to fall, risk-averse investors can consider creating new FDs to make the most of the current rates
Your bank fixed deposit (FD), it seems, will earn a little less in the coming days. According to banking experts, the Reserve Bank of India (RBI) is expected to lower the policy rates soon, which will result in banks slashing lending and deposit rates. Also, there are reports that the finance ministry is nudging public sector banks to lower their FD rates, including the special rates given to senior citizens.
The logic is that it will help banks reduce lending rates, which will help boost economic growth.
Now, you have to wait and watch how the scenario may unfold. But you shouldn't wait to take stock of your FD portfolio and take remedial steps, especially if you are a senior citizen. These steps include booking new FDs as soon as possible, switching to senior citizens savings scheme (SCSS) and tax-free bonds or even directing some money to debt mutual funds.
FD IDEAL FOR LOWER TAX BRACKETS
Since FD rates are expected to fall, risk-averse investors can consider creating new FDs to make the most of the current rates. "It is widely speculated that the RBI will cut rates looking at the low IIP numbers and falling GDP growth rates. Therefore, locking money into FDs at the present rates for the medium to long term would be the right thing to do," says Kapil Narang, chief operating officer, Ameriprise India, a financial planning firm.
"Those looking to lock into current rates can look at fixed deposits, though taxation on deposits could be a point for consideration," says Vishal Kapoor, head, wealth management, Standard Chartered Bank. Investment advisors feel FDs are better suited for investors in the lower tax brackets due to their tax inefficiency. "Post-tax returns on FDs are not very attractive for people in the higher tax brackets.
For instance, if we consider the current FD rate at 9.5%, the post-tax
returns will be around 6.5% for those in the higher tax brackets,"
points out Anil Rego, CEO of wealth management firm Right Horizons.
SENIOR CITIZENS SAVINGS SCHEME
Given that FD may yield lower returns going forward, risk-averse individuals should look at Senior Citizens Savings Scheme (SCSS) as an alternative. After all, it also offers tax benefits under section 80C - investments up to Rs 1 lakh in the scheme are eligible for deductions.
"The post office senior citizen scheme is attractive in terms of the interest rate offered (9.3% per annum) and should form a part of any senior citizen's portfolio," says Narang. However, if you plan to invest all your money in this scheme, you need to factor in other parameters.
"Next year onwards, SCSS rates will be revised annually. Therefore, it might be a better idea to lock money into longer-term FDs offering returns of close to 9% now," says Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories. Liquidity and taxation are the other limiting factors in SCSS. The scheme comes with a five-year lock-in period, though interest is paid out every quarter, ensuring some liquidity. In case of premature exit, penalties of up to 1.5% could be levied. Also, the interest earned is taxed if it is over Rs 10,000.
TAX-FREE BONDS
The coming months will see the launch of many tax-free bonds in which senior citizens can consider investing.
"Tax-free bonds floated by institutions like REC can be looked at, as they offer a tax-free rate of close to 8%. In effect, this works out to 11% pre-tax. The bonds may be especially attractive in these times when the interest rates are expected to go down," says Narang. Do note, though, that these bonds come with longer tenures. "They are long term in nature, with tenures of 10 to 15 years, though you can trade them on the stock exchange and offer interest payments annually," he adds.
The logic is that it will help banks reduce lending rates, which will help boost economic growth.
Now, you have to wait and watch how the scenario may unfold. But you shouldn't wait to take stock of your FD portfolio and take remedial steps, especially if you are a senior citizen. These steps include booking new FDs as soon as possible, switching to senior citizens savings scheme (SCSS) and tax-free bonds or even directing some money to debt mutual funds.
FD IDEAL FOR LOWER TAX BRACKETS
Since FD rates are expected to fall, risk-averse investors can consider creating new FDs to make the most of the current rates. "It is widely speculated that the RBI will cut rates looking at the low IIP numbers and falling GDP growth rates. Therefore, locking money into FDs at the present rates for the medium to long term would be the right thing to do," says Kapil Narang, chief operating officer, Ameriprise India, a financial planning firm.
"Those looking to lock into current rates can look at fixed deposits, though taxation on deposits could be a point for consideration," says Vishal Kapoor, head, wealth management, Standard Chartered Bank. Investment advisors feel FDs are better suited for investors in the lower tax brackets due to their tax inefficiency. "Post-tax returns on FDs are not very attractive for people in the higher tax brackets.
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SENIOR CITIZENS SAVINGS SCHEME
Given that FD may yield lower returns going forward, risk-averse individuals should look at Senior Citizens Savings Scheme (SCSS) as an alternative. After all, it also offers tax benefits under section 80C - investments up to Rs 1 lakh in the scheme are eligible for deductions.
"The post office senior citizen scheme is attractive in terms of the interest rate offered (9.3% per annum) and should form a part of any senior citizen's portfolio," says Narang. However, if you plan to invest all your money in this scheme, you need to factor in other parameters.
"Next year onwards, SCSS rates will be revised annually. Therefore, it might be a better idea to lock money into longer-term FDs offering returns of close to 9% now," says Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories. Liquidity and taxation are the other limiting factors in SCSS. The scheme comes with a five-year lock-in period, though interest is paid out every quarter, ensuring some liquidity. In case of premature exit, penalties of up to 1.5% could be levied. Also, the interest earned is taxed if it is over Rs 10,000.
TAX-FREE BONDS
The coming months will see the launch of many tax-free bonds in which senior citizens can consider investing.
"Tax-free bonds floated by institutions like REC can be looked at, as they offer a tax-free rate of close to 8%. In effect, this works out to 11% pre-tax. The bonds may be especially attractive in these times when the interest rates are expected to go down," says Narang. Do note, though, that these bonds come with longer tenures. "They are long term in nature, with tenures of 10 to 15 years, though you can trade them on the stock exchange and offer interest payments annually," he adds.
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