How to invest your 1 lakh rupees in bank fixed deposit

March 2011
This is the season of post recession. Economic condition is in inclined phase, curves are growing in Y axis. And so your interest in bank fixed deposits. This is the season of above 9% interest rate in FDs.

Banks are offering 9.25% interest in bank FDs.
ICICI bank is offereing 9.25% on 590, 790 or 990 days.
Country's biggest bank SBI is also offering 9.25% to general category of investors for 555 and 1000 days.

Now, thing is where to invest.
In banking terms: SBI country's largest bank is more stable compared to ICICI, country's largest private sector bank. Check "sidekick 1" for more details for whether to invest in SBI or ICICI.

Now, reconsider with the rules and regulations imposed by Indian income tax law on investments.
Rule No 1: Whenever you invest more than 50,000 in bank FDs you are liable to pay tax.
Rule No 2: Whenever the interest in your interest income earned is more than 10,000 you have to pay income tax on this excess amount.
Rule No 3: If you have not supplied PAN card while doing the FD, bank will deduct 20% instead of 10% as income tax on the access amount earned above 10,000. This will be directly deducted from your interest by the bank.
Rule No 4: If you want the bank not to deduct TDS amount earned above 10,000 then you have to submit for 15G/15H to the bank (every year, since tax is calculated every year, and not just once at the time of opening the FD).

Considering rule No 3 is not applicable to you, so you have to pay 10% income tax on your earnings above 10,000.

I have 1 Lakh rupes to invest in FD, where to invest?
If I invest 1lakh rupees for 9.25% interest rate what happens to my investments?

Let's calculate:

Case 1000:
At the end of second year you have to pay income tax of Rs.492.81, no additional tax at the end of 1000 days. SO,total tax liability is Rs. 492.81/-. Hence your real income is 28451.26 - 492.81 = 27958.45

Case 990:
Total income earned = 28132.96 - 492.81 = 27640.15

Sidekick1:
Difference:
27958.45 - 27640.15 = 318.3 in 10 days.

So, we shall invest in SBI instead of ICICI to gain this extra weekend buffet lunch for one in 300 rupees if we can wait for 10 extra days.

Let's exploit the rules now:
1. Let's invest 50,000 and 50,000 in two separate branch of SBI.
The scene changes like this now:

This time we have earned a interest of 14225.63 x 2 = 28,451.26.




No, TDS will be deducted at the bank level since your interest for a single year is less than 10,000. But now the onus is on you to pay tax of 492.81 on this interest earned at the end of second year in your income tax details.
2. Please pay tax.
Sidekick 2:
3. If your total earning is less than 1,60,000 you no need to pay tax.

Go for PPF even if do not need it

Putting money in Fixed Deposit attracts income tax on withdrawal.

Let's assume that you want to invest 10Lakhs rupees in fixed deposit with the current 9% interest rates. At the end of the year, you will earn a massive 90 thousand as an interest on this 10Lakhs fixed deposit.

10Lakhs FD for 2yeaR 16 days will earn you 9% interest in HDFC Bank.
So, at the end of 1 year you will have 10L90K.

But, this interest is taxable. Only to a max 10K there is no tax on bank deposits. So, remaining 80K will attract income tax at 30% rate.

10% tax of 80K is around 8K. This is a big amount.
As per section 206AA introduced by Finance(No.2) Act.2009 effective April 01,2010,every person who receives income on which TDS is deductible shall furnish his PAN,failing which TDS shall be deducted at the rate of 20% in case of Domestic deposits and 30.90% in case of NRO deposits.

In that case, your overall earning will be 90-20% of 80 = 74K meaning 7.4% on your money.

Hence, what you earn at the end of it is 90-10% of 80K = 82K.
It also means, you are earning an interest of 8.2% only instead of 9% on your money. And in the worst case this will come down to 7.4% (lower than PPF 8% interest).

But, this is the case when you earn a bank interest rate of 9% on your money. But when bank interest rate on FD is 7% then your effective earning comes down to 70K -10% of 60K = 6.4% on your money.

Now, if you would have put your money in PPF then you would enjoy 8% interest rate with whatever happens to Indian Financial market or Global market or Economic recession.

Plus you will be free from all your worries about income tax.


That is why I advised you to put your money in PPF which can be opened in SBI or Post Office. Now a days, you can online deposit your money into SBI PPF a/c. And the interest you earn is less than 9% but 8%. The good part of this investment is that on withdrawal this is tax free. No need to pay any income tax on the entire amount you get once the PPF a/c matures.

So, go and open your PPF a/c today with minimum of Rs500/- per annum.
If you want to invest some lum-sum money into your PPF a/c after 5years then that money will be get locked only for 10years for you and not full 15 years.

And you will still enjoy a guaranteed return of 8%.

You might earn much more return if you invest your money in Mutual Fund, but there is no guarantee that your money will compound at the same rate. In case of recession your money will not perform, and will lead into losses.

Further this helps you diversify your investments.

--Kongkon