YTM method to calculate pre-tax return on deposit
This opinion holds greater significance when one looks at the pessimistic macroeconomic environment scenario for the forthcoming financial years.
Scheme details: The initial amount required to be deposited is R10,000. The FD offers an annual interest rate of 9% for five years for senior citizens with a maturity period of five years. The interest rate for non-senior citizens is 8.5% per annum, while other features of the FD are the same for them. The bank will return Rs 10,000 at the end of the fifth year to the investor, along with the interest proceeds. The scheme also offers income-tax deduction for the amount of deposit, subject to a total ceiling for deduction of R1 lakh. This deduction brings down the initial deposit amount of R10,000 by 30% to R6,910, assuming the investor is in the 30% tax slab. The investment cannot be pre-closed before the expiry of the maturity period.
The big question: At the outset, it is not believable to earn 17.39% annual return from a FD as it is something historic and even if one assumes an annual inflation rate of 8%, this investment vehicle offers 9.39% real rate of return, which is on par with the returns offered by equity investments
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