With banks continuing to reduce interest rates on deposits, the real rate of return to savers is sliding once again. The real rate of return, pre-tax, on a one-year State Bank of India (SBI) deposit is now 2.25% compared with over 4% in July. Till about a year ago, the real rate of return from bank deposits was negative given raging inflation, which was one reason the growth in deposits hit a 50-year low of 11.4% last year.
With inflation easing significantly, savers were better off for a while. However, SBI now offers just 7.25% for one-year money while consumer inflation or CPI for October came in at 5%. The post-tax return for those in the 20% bracket works out to 5.76%.
Meanwhile, tax-free bonds of PSUs, which offer returns of around 7.2%, might be a better option as a savings product. True, these bonds are highly illiquid but for those willing to put away the money for 10 years or more, the rates are attractive. One would, of course, do well to first park R1.5 lakh in a PPF account, which offers a tax-free return of 8.7%. And make sure another R1.5 lakh has been put into the Sukanya Samriddhi scheme for a daughter — up to the age of 10 — to earn a tax-free 9.2%.
Even a one-year post-office deposit offers 90 basis points more than an SBI deposit of a similar tenure, on a post-tax basis. Also, corporate fixed deposits are offering 100 to 140 bps more than bank term deposits but carry a slightly higher risk.
For those with more to save, tax-free bonds offer the best returns. The recent REC bonds, for instance, fetched a coupon rate of 7.14%, 7.34% and 7.43% for maturities of 10, 15 and 20 years, respectively. That was lower than what PFC and NTPC had offered — 7.36%, 7.52% and 7.6% for similar tenors. Tax-free bonds score over bank deposits as the interest earned does not attract income tax and, consequently, no tax is deducted at source, unlike in the case of bank deposits. However, the investments made in these bonds are not eligible for income tax deductions.