Some investment avenues for those who don’t want to take the risks associated with stock markets.
When the stock markets go the downside way, investments in fixed deposits (FDs) become attractive again. FDs remained a dormant investment avenue for the past few years, mainly because of the fact that the interest rates were low, and these investments are unsecured. So, the government’s saving schemes, especially the post office saving scheme, had an edge over FDs.
Fixed deposits attractive again
However, some recent changes have again brought FDs into the limelight. The contributing factors include the decision to give tax breaks in terms of coverage under Section 80C of the Income Tax Act. The second major factor has been the gradual increase in the interest rates on FDs.
These deposits have been brought on par with small savings schemes. Investments in term deposits for those planning to take a tax deduction will have a lock-in period of five years. The government notification says that no term deposit can be encashed before five years from the date of investment. The ceiling on investments is Rs 1 lakh. The interest earned on these deposits will attract tax either on an accrual basis or on receipt basis. If the deposit is made with a joint holder, the tax benefit will be available only to the first holder.
Investors can now claim benefits under Section 80C of the Income Tax Act, by putting their money in FDs. Investors can include the option of fixed deposits to complete their investments under Section 80C. There is a five-year lock-in period for investors from the date of deposit, during which, investors can’t withdraw their money. The liquidity of the instrument will be further affected as investors cannot pledge the term deposit as collateral to secure a loan or some other asset.
NSCs serve as collateral too
In case of investments in NSCs the returns is eight percent. The tenure is six years. You can pledge the NSCs as a collateral for a loan. The accrued interest is considered as a further investment and hence, it is also eligible for Section 80C benefits. The investments are totally secured in nature. They constitute a medium term investment avenue. In the case of NSCs, the income generated in the form of accrued interest is taxable each year.
PPF a long-term avenue
On the other hand, an investment in the Public Provident Fund (PPF) is meant for long-term investors. The investment is totally secure. The interest is exempt from tax. The deposits are exempt form wealth tax. The rate of return here is not fixed for the entire duration of the investment, but is announced regularly.
The interest rate is varied by the government at periodic intervals. The interest rates could change in the middle of the investment period. Further, the investment is for a fixed period of 15 years. PPF is suitable for investors with a long-term investment horizon. The funds get locked for a long period of time.
Tax Angle
The tax aspect needs to be factored in. The interest income from fixed deposits is fully taxable, without the benefit of any deduction in the hands of the receiver. This means that for all those who come under the highest tax bracket, the applicable rate will be 30 percent, plus cess.
Investors will be attracted to invest in fixed deposits only if the interest rates are high enough. Investments in FDs would have to still compete with these other prevailing investment avenues available to the investor. The investors would have to consider the interest rates, returns, lock in period, liquidity and safety before taking an investment decision.