Earning tax-free returns from Fixed Deposits.

Today I will share with you some tips to save tax on your fixed deposits in Bank.

Most of you would already know that, currently banks are offering Fixed deposits as high as @9.75% p.a. that is compounded annually to give you an annual yield of 10.11% p.a. Some banks are also offering 10.25% annual interest on your fixed deposits. This amount is subjected to tax deduction at source (TDS) @10.3%. Further as per your tax slabs, you need to pay the balance tax amount as self-assessment tax. Lets see how and under what conditions this tax can be saved.

Always make a fixed deposit in the name of those family members who satisfy all the following conditions:

1.     The person should be at least 18 years old (Adult).

2.     She should not be your wife.

3.     The person is either

a.     Not earning OR

b.     Whose income, after adding such interest income is within the exempted tax range.

So, the ideal candidates, in the name of whom you can open fixed deposit accounts are your parents and your children above 18 years of age satisfying the above 3 conditions. You can gift the amount for fixed deposit to such members. The members need to then open a fixed deposit account in their name. Gifting money to your family members does not attract any gift tax. Gifting to wife and minor children also does not attract any tax but the income from such gifted amount is clubbed with your income. Hence you will not be able to save tax on that interest earned. That is the reason of conditions 1 and 2 above.

Lets see this by an example.

Suppose you have a child, who is 18 years of age and is studying. You gift an amount of 10 lakh to that child and open a fixed deposit in his/her name @9.75% p.a. After 1 year, he/she will earn Rs.101123 as interest on this fixed deposit. As the child was not earning, this entire amount is tax free in the hands of your child. Make sure to deposit for 15G with your bank to avoid TDS, else the bank will deduct TDS @10.3% and you will need to get refund of that from IT department.

In case of earning children e.g. earning Rs.1.2 LPA and the exemption limit is for example 1.9 lakhs. The difference of Rs.70000 (1.9L – 1.2L) can be earned as tax-free interest. So assuming like the above example, the interest of Rs.101123 will not be completely tax-free. The amount Rs.31123 (101123-70000) will be taxable unless and until the tax saving investments are done. In case you do the tax saving investments, then you can use that range also to earn tax-free interest.

Hope you like this post and get some benefit out of this.

NHAI Tax-free Bonds

The long awaited NHAI bonds are now available for investors. These bonds will give a return of 8.2% p.a. for 10 years and 8.3% p.a. for 15 years, both payable annually. The good news is that this return is tax-free. Yes, you read it right, its completely tax-free. The bad part for some might be that the minimum amount for a retail investor is Rs.50000/-. Still looks great, but is it worthwhile for you to invest in these bonds? Lets find out…

Today, most banks are providing fixed deposits at the rate of 9.75% p.a. and some even up to 10.25% p.a. This is not the senior citizen rate. Senior citizen rate is higher than this. This return is compounded quarterly. Yes, this means, an annual yield of 10.1123% from a 9.75% FD and 10.65% annual yield from 10.25% FD.

NHAI bond of 10-year time will provide a return of 8.2%. No tax, nothing to be calculated.

Lets do some calculation for an FD @ 9.75% p.a. compounded quarterly (10.1123%), payable annually. The pre tax yield is 10.1123%. Lets see its tax paid returns in various tax slabs.

	Tax @ 10.3%	Tax @ 20.6%	Tax @ 30.9%
Post tax return	9.07%	8.03@	6.98%
Diff from 8.2%	0.87%	-0.17%	-1.12%

From the above table, it is clear that a person in 10% tax bracket will earn 0.87% more from FD than from NHAI bonds. The one in 20% & 30% tax brackets will earn 0.17% and 1.12% more from Bonds than from FD. For sure the person in 10% tax bracket in this year will not remain in the same tax bracket for 10 or 15 years. So we see that till now bonds are looking better than FDs. But wait, there is more.

Capital Gains Tax

The above is true in the case when you remain invested for full tenure of bonds. But in case you wish to exit from bonds by selling those in a stock exchange, you need to pay capital gains tax. Shocked? Yes its true.

In case you sell the bonds before one year, the income will be clubbed with your other income and you will be taxed at normal rates as per slabs (short term capital gain tax). So the 9% profit from sale of bonds in stock exchange (assuming you sold those at premium of 0.8%), your yield will reduce to below 6% in highest tax bracket.

In case you sell these bonds after at least one year, you need to pay long-term capital gain tax. This tax is 10% without indexation and 20% with indexation. This long-term capital gain is not exempted like other stocks and equity mutual funds as no STT is charged in sale of bonds in stock exchange. So in this case also, your actual yield will be much lower than actual 8.2%.

Conclusion

In short, I will recommend these bonds only to those people, who can remain invested in this for the complete tenure and are expected to be in 30% tax bracket in the near term. Else the Fixed Deposit with banks is the safest and the most lucrative option. Hope you all find this helpful in making the right decision.

Stay tuned to know, how you can earn tax-free returns from fixed deposits. After reading that, you won’t even think of investing in bonds! 
Earning tax-free returns from Fixed Deposits 

Don’t forget to leave a comment if this post has helped you in any way to make a right and known decision. Happy Investing!