A look at fixed-income schemes from banks that enjoy tax benefit
While equity may offer higher returns, it is very volatile. Hence, some portion of an investor?s portfolio needs to be in fixed-income schemes of banks (or the Post Office) to provide stability. The popular argument today against fixed-income schemes is that with inflation at around 12 per cent, you lose money on such schemes. However, inflation will not remain at this high level always. Moreover, in case of a market downturn, your fund value could decline as much as 30-50 per cent if it is entirely in equities. If this happens at a time when you need the money, you could be in trouble. Therefore, some portion of your corpus must be parked in fixed-income schemes. The tax benefits offered on some of these schemes, moreover, enhances their effective rate of return.
Term deposits
One product offered by banks, which comes under the bank term deposit scheme, 2006, is ?tax saving deposit scheme?, where one gets both an assured return and tax benefit. The key features of this scheme are:
Tenure. Minimum 5 years and maximum up to 10 years.
Investment. Minimum amount that can be invested is Rs 100 (varies from bank to bank) and maximum limit allowed is up to Rs 1 lakh per year.
Holder. This facility can be availed by both a single as well as a joint holder.
Liquidity. No loan facilities are available under this scheme and the account cannot be closed prematurely.
Tax benefit. An investor can claim an income tax deduction of up to Rs 1 lakh under Section 80C.
For interest rates offered by various banks, refer to the table above. An additional interest rate of 0.5 per cent is offered to senior citizens. Further, the interest on such deposits is liable to tax deducted at source (TDS).
PPF
Another small saving option offered by banks is the Public Provident Fund (PPF). Here, your investment limit is in the range of Rs 500 to Rs 70,000 per annum. The maximum tenure is 15 years. This can be extended in blocks of five years. Partial withdrawals are allowed after the end of five financial years. The rate of interest is 8 per cent on a PPF account.
One attractive feature of a PPF is that interest income from it is exempted from Income Tax. Deposits in PPF also qualify for a tax deduction under Section 80C of Income Tax Act.
Both these options from banks that have been given tax benefits to encourage long-term saving and nvestment.
