Income Tax Rates / Slabs: FY 2010-11

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Union Budget 2010 has reduced the tax liability of individual income tax payers by broadening the tax slabs.

The basic exemption limit remains same. Income tax rates also remain unchanged but the tax slabs have been widened. Finally, the education cess of 3% is retained.

The new / revised tax slabs / rates applicable to individual tax payers for the financial year (FY) 2010-11 and assessment year (AY) 2011-12 are as follows:


Latest / Revised Income Tax Slabs / Rates for FY 2010-11

New IT Slabs/ Rates for Resident Senior Citizens (FY 2010-11):

Up to Rs 2,40,000-----------------> No tax / exempt
2,40,001 to 5,00,000-------------> 10%
5,00,001 to 8,00,000-------------> 20%
Above 8,00,000-------------------> 30%


New IT Slabs / Rates for Resident Women (below the age of 65 years) (FY 2010-11):

Up to Rs 1,90,000-----------------> No tax / exempt
1,90,001 to 5,00,000-------------> 10%
5,00,001 to 8,00,00--------------> 20%
Above 8,00,000------------------> 30%


New IT Slabs / Rates for Other Individuals (FY 2010-11):

Up to Rs 1,60,000 ------------------> No tax / exempt
1,60,001 to 5,00,000---------------> 10%
5,00,001 to 8,00,000--------------> 20%
Above 8,00,000--------------------> 30%



Also see:

1. Tax Rates / Slabs FY 2009-10

2. DTC Tax Rates / Slabs

5 Guidelines for ELSS Investing

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Your first choice should be equity linked tax savings scheme (ELSS) for making tax-saving investments.

While investing in ELSS, remember the following guidelines:

1. It is not without reason that ELSS is considered as best option u/s 80C. We say ELSS has potential to deliver good returns over a period of time in comparison to other options u/s 80C. So let’s study the numbers to see the actual performance of ELSS funds over last 10 years. Here’s the ELSS returns during last few years as per Value Research, a mutual fund rating agency (as on Feb 19, 2010):

Time---- Category Avg.------Best Fund------Worst Fund
1-Yr------ 84.81-----------------126.26--------------52.20
3-Yr-------6.55--------------------18.02-------------- (3.35)
5-Yr------18.20-------------------26.75----------------8.79
7-Yr------30.45-------------------44.67---------------19.14
10-Yr----12.92-------------------23.81-----------------3.46

Now just compare the returns with other tax-saving options available u/s 80C. Although 2yr & 3 yr returns are very bad due to the market meltdown of 2008, the 5 year, 7 year & 10 year returns are indeed very good.

But now that the Sensex has already risen by about 85% during last one year (closed at 16,286.32 on 23rd Feb 2010, with a P/E multiple of 20)and is currently oscillating in the range of 16K to 18K, going forward can we still expect good returns from equity?

Though the current Sensex valuation of around 20 times looks expensive, but considering the future growth in earnings, we can expect good returns from stocks. Remember, India’s long term growth story is still intact!!


2. Don’t invest in ELSS except from tax saving point of view. Otherwise, it is better to invest in plain vanilla diversified equity funds. There are basically two reasons:

i.) Liquidity: Unlike plain-vanilla diversified equity funds, investment in ELSS is locked for a minimum period of 3 years. But doesn’t one invest in equity for long term? Yes, indeed, but in case of an emergency you’re stuck. Secondly, suppose that the fund gets downgraded to 2- or 1- Star in next 1 or 2 years and you would like to transfer your money to a better performing scheme. Again, you can’t!

ii.) Performance: As compared to ELSS, equity diversified category is performing a lot better. See the excel table.



We notice that equity-diversified funds are in fact performing better than ELSS category, but the performance gap narrows down over a period of time.

Average hides a lot more than it reveals. We also observe that although category average of diversified is a little better than ELSS, but the variation in returns between best & worst is too high in case of diversified funds as compared to ELSS funds. What exactly does it mean?

-First, it implies that while choosing equity diversified funds one needs to be a little more extra careful. Put another way, negligence in choosing the right fund can prove more expensive in case of equity diversified funds as compared to ELSS.

-Second, ELSS funds category provides more downside protection (see the performance of worst funds) than equity diversified funds. In other words, performance of worst fund in ELSS category is much better than worst Equity diversified fund during all the years. So, we can say that ELSS funds are comparatively less risky. There is a valid reason behind it. First, lesser number of funds in ELSS category and second, the lock-in period of 3 years provides stability to returns—fund managers can take long term bets.


3. Understand why choosing the right mutual fund matters and can make a significant impact over a period of time. Invest in any of the 5-star or 4-star rated funds by Value Research.

However, it will be a lot better if you preferably go for top three among the best ELSS funds for 2010. Anyhow, if would like to go for others, know that since my last review of ELSS funds in November 2009, two new funds DSPBR Tax Saver & Religare Tax Plan have been upgraded to 5-star while Fidelity Tax Advantage stands downgraded to 4-star. But remember all the 3 ELSS funds are less than 5 year old. Further, Franklin Tax shield stands downgraded from 4-star to 3-star.

Don’t invest in new funds without a track record. First know that at present (Feb 2010) there are total of 37 ELSS as follows:

Not Rated—10
1-STAR-------03
2-STAR-------06
3-STAR-------09
4-STAR-------06
5-STAR-------03
Total--------37

Out of total of 37 ELSS funds, four funds have been launched in the year 2009 and other four in 2008. So, avoid them because these don’t have any track record (there’s no long term performance history). Once again I repeat, choose only out of 5-star & 4-star funds.


4. Taking a long term view can do wonder to your investment returns. So, invest for the long term. Put a self-imposed lock-in-period of minimum 10 years (ignoring the mandatory lock-in-period of 3 years). In other words, lock-in period of 3 years doesn’t mean that you can’t remain invested after that. So don’t ever think of making an exit after 3 years.


5. Lastly, remember the following tips:

i.) Spread your investment across 2 ELSS funds but not more.

ii.) Invest regularly in small amounts.

iii.) Choose growth over dividend and reinvestment option.

iv.) Be wary of advertised returns (even the claim that the scheme is best performing equity fund in the world might not be true)


This is my sixth post about ELSS and I think that by now I’ve covered almost every aspect of ELSS investing.

Make the most of your ELSS investments!!


Also see:

1. 10 Principles of Mutual Fund Investing
2. 10 Smart Tips for Section 80C Tax-Savings
3. How to Invest in ELSS Funds

How DTC is going to impact your PPF investments?

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The Direct Tax Code (DTC), the new tax code proposed to be replacing the Income Tax Act, 1961 from April 1, 2011 is going to introduce EET (exempt, exempt, tax) regime having deep impact on your tax saving plans.

You may have read elsewhere that DTC is going to have an adverse impact on sale of life insurance. But The Money Quest holds a completely different view. I think that DTC is only going to encourage investment in life insurance plans (instead of giving a push to term plans) and accordingly not in the long term interest of investors.

A few days back a reader named Seeta asked, [see: PPF Investing Tips]

I want to invest in PPF. For the financial year 2010, I have already made my tax savings. So i was thinking of investing in PPF for the year Apr-2010 to Mar 2011, but as you have mentioned we need to pay tax at the time of maturity from April 2011. Please suggest what is the best option? Should i start my ppf account before Apr, 2011 to avoid paying tax at time of maturity?

Therefore, after DTC impact on life insurance, this post is going to examine the impact of new Direct Tax Code (DTC) on PPF (Public Provident Fund) investments in greater detail. So, here’s the answer to some of the most common questions about the effect of DTC on PPF:

Q-1: How the DTC is going to affect my PPF account?
Ans: Under the current EEE (exempt, exempt, exempt) tax regime, the PPF account is exempt at all the three stages: First, when you make deposit in your PPF account you get tax deduction under section 80C (i.e., the amount of your income to the extent of deposit in your PPF account gets exempted from tax). The second stage in the accumulation of interest in your PPF account which is also tax exempt and third stage is at the time of maturity when you withdraw your money. As you don’t pay any tax at the time of withdrawal, it is called EEE regime.

Effectively, at present you get two kinds of exemption on your PPF investments: first is when you deposit your income in PPF account, it indirectly gets exempted via section 80C deduction and second is the interest earned on your PPF.

Now, DTC is going to remove both these exemptions via EET (exempt, exempt, tax) regime. The only concession allowed is the deferment of your tax i.e. the tax on your current income to the extent of deposit in PPF account gets deferred till the time you make withdrawals. Similarly, the interest amount also becomes taxable at the time of withdrawal.


Q-2: What about the existing balance in my PPF account?
Ans: As per new tax code proposed to be implemented from April 1, 2011, accumulated balance in your PPF account as on 31st March 2011 will be exempt from tax (grandfathering clause). In other words, as per the direct tax code (DTC), only new contributions made on or after the commencement of the code will be subject to tax.


Q-3: What about further interest on the existing balance as on April 1, 2011?
Ans: It is not clearly spelt out in the DTC, but based on the interpretation of the proposed provisions, it seems that any further interest on this accumulated balance would be subject to tax.


Q-4: Should I continue to invest in PPF? Can it still be considered as best debt option?
Ans: Although, it will lose much of its present appeal (8% tax free assured rate of return in addition to section 80C deduction), but you won’t have much choice. Even keeping in view the implementation of EET regime under DTC, it still makes sense to go for PPF due to following reasons

1. It will still maintain its relative superiority over other tax saving options under the new tax code.

2. It is quite probable that there is some dilution in the proposed harsh provisions (particularly the EET regime) of DTC.

3. Even if DTC comes into operation in its present avatar, the option will always be open to you to change your investment strategy in future. Your existing investments won’t get affected.

4. Last of all, tax deferment by investing in PPF makes sense because hope will always be there that government may have a change of mind in the near or distant future not to tax our retirement savings.

So, without any second thoughts you can open your PPF account or keep continuing investing in existing PPF account.


Q-5: Any other changes regarding PPF?
Ans: Yes, recycling strategy will no more be useful.


Q-6: What if any body doesn’t claim tax deduction (u/s section 66 of DTC) on the amount deposited in PPF? Then what?
Ans: This is one of the major draw back of the DTC provisions and will result in double taxation.


Q-7: Finally, how would I reduce my tax outgo under DTC regime? Is there any way out?
Ans: Yes, there are two ways:

1. First is withdrawing amount in installments rather than at one go. This will be particularly useful for those falling in the lower tax brackets.

2. Second strategy is to make contribution in the PPF account of your minor child (I hope that the government will continue to allow tax benefit on the contributions so made…) and make withdrawals once he becomes a major. Now, if the child has attained majority, then the PPF withdrawal would be deemed as his income and accordingly taxed in his own hands. And, if the child doesn’t have any other income at that time, one can avoid paying any tax by limiting the total amount of withdrawal below the basic exemption limit / lowest tax slab.

Finally, as you must be already aware that it is very doubtful that DTC will be implemented in its present form (EET is also one of the controversial provisions). Let’s see what new changes are in store.

What do you think? Are you continuing with your PPF investments? Or, do you have any other apprehensions about DTC?


Also see:

1. PPF FAQs
2. DTC – Tax Calculator
3. DTC Tax Rates / Slabs

ELSS: Dividend Vs. Reinvestment Vs. Growth Option

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I’ve already stressed that you should prefer growth option over the dividend option while investing in equity funds including ELSS. It is a false perception that dividend declaration is a sign of good performance by the fund (there is nothing to stop a poor performing fund or fund making losses from declaring dividend). Moreover, the dividend paid is your own money.

In case of ELSS, the only difference is due to section 80C tax benefit. Although, your effective tax deduction is more for dividend option (because your net invested is lower as compared to growth option), but this, in my view, is not a major factor unless you’re short of cash. In the long run, growth option always turns out to be better (unless there is a prolonged recession and markets continue to slide, in that case money already taken out via dividends gets protection from further downfall)

Now, Mr.Ajay asked [see: How to invest in ELSS],

“Could you please clarify the difference between Growth and Dividend Re-Investment? Is it based on the current Tax Policy?”

No doubt, because of this third option (i.e., dividend reinvestment) it sometimes becomes really confusing to decide: which is the best option among the three? Are you also facing similar dilemma? Don’t worry; this post is going to make it easier for you to decide.

Note: This discussion is only for ELSS funds and not applicable in case of other equity funds or debt funds.

In the case of dividend reinvestment option, the dividend is automatically reinvested and gets eligible for further tax deduction under section 80C (as dividend reinvested is treated as fresh investment). It is similar to recycling strategy of PPF wherein you get double tax benefit on the same money.

For example, A invests Rs 100 in growth option and B invests Rs 100 in dividend reinvestment option. Further, let’s assume that immediately afterwards a dividend of Rs 15 is declared. Now instead of paying out this dividend to B, mutual fund will reinvest the dividend in the same scheme on behalf of B. Afterwards, the portfolio value of both A and B is again similar (Rs 100). So, how does it make a difference? While A will be eligible for tax deduction on Rs 100, B will get tax benefit on Rs 115 by investing Rs 100. B’s decision seems to be wiser. Isn’t it?



Ok, this was the scenario when the dividend is declared immediately after your investment. Now, what if the fund declares a dividend after say 2 years? It is quite possible that in that particular year you would have already exhausted your section 80C limit. And, what if the fund is also lagging in performance? On top of it, as dividend reinvested is considered as fresh investment, the amount of dividend re-invested will get blocked for another 3 years (increase in effective lock-in-period).

In a nutshell, out of the three, growth option always scores over dividend & dividend reinvestment option because your gains remain invested which is good for long term wealth creation. But still if you want to go for dividend option, better go for dividend payout rather than dividend reinvestment because it is more flexible. The option is always open to you whether to reinvest the dividend (for availing further tax concession) or not and in case of reinvestment whether to invest in the same ELSS or some other ELSS fund.


Also see:

1. Best ELSS for 2010
2. Review of Birla Sun Life Tax Relief'96
3. Why ElSS is considered as best section 80C option?

Salary TDS Calculator

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In the series of calculators, The Money Quest now brings you TDS Salary Calculator in excel.

If you want to calculate TDS on your salary income on your own or if you would like to confirm the TDS figure calculated by your employer, you can take the help of this TDS salary calculator.

This excel based TDS Salary calculator is easier to operate and will cover majority (almost 80-90%) of the salary tax calculations, but in future I’ll make further changes based on your feedback to make it universally applicable.

The TDS salary calculator is divided into 3 worksheets:

Sheet-1 Tax Computation Sheet: This worksheet will show the detailed tax computation and the TDS figure. But first you’ll have to enter salary details in Part-1 & 2 of the calculator.

Sheet-2 HRA Details: In case you’re receiving HRA as part of the pay package, then enter month-wise following details in this sheet: city of residence (“M” for metro and “N” for non-metro), basic pay, HRA received and rent paid.

Sheet-3 Other Salary Details: Enter other salary details including value of perks, other income (if any), details of investments and expenditure eligible for tax deduction. Also enter tax relief u/s 89 (if any) and tax already deducted at source.

Here’s the TDS Salary Calculator for FY 2009-10:

TDS Salary CALCULATOR (FY 2009-10)


Notes / Instructions for Using TDS Salary Calculator:
1. In the “Tax Payer Status” in “Part-2 Other Salary Details”, please enter 1 for senior citizens [i.e., if you’re an individual (man / women) above 65 years at any time during the year 2009 – 10 (Apr 2009 – Mar 2010)], 2 for Women and 3 for Man.

2. Enter monthly figures in “HRA details” and annual figures in “Other Salary details” of the TDS calculator.

3. LTC / LTA is exempt subject to conditions specified in section 10(5) read with Rule 2B and can’t exceed the actual amount incurred on travel. Please note that only the taxable portion (if any) of LTC / LTA received during the year is to be entered in the TDS calculator.

4. Transport Allowance & Medical Reimbursement: It has been assumed that transport allowance is not exceeding Rs 800 p.m. (Rs 9,600 p.a.) and medical reimbursement is not exceeding Rs 15,000 p.a. So, both are considered as fully exempt and not shown in the TDS calculator. However, if you happen to receive them in excess of the above limit, same can be shown in “other taxable allowances, (if any)” column of the calculator.

5. There are many other petty allowances which are exempt up to a certain maximum limit e.g. , child education allowance is exempt up to Rs 100 per month per child (up to a maximum of two children) and similarly child hostel allowance is exempt up to Rs 300 per month per child (for a maximum of two children). Any amount received in excess of the aforesaid limits can also be shown in “other taxable allowances, (if any)”.

However, if the school fees of employee family members is paid directly by the employer to the school or if education expenses of employee family members is reimbursed by the employer, then entire amount is taxable as perks and therefore to be shown in “Other perks, if any”.

6. If professional tax is paid by you, enter under “Expenditure / Savings” and if borne by your employer enter under “Value of Specified Taxable Perks”.

7. “Other income declared, if any” does not include the EMI of home loan for self-occupied house property. In other words, interest and principal repayment of home loan for a self-occupied house property is to be separately shown under the “Expenditure / Savings” head. Also, note that you’ll need to bifurcate your EMI into principal and interest portion yourself if you don’t have the lender certificate or amortization schedule with you.

8. Employer’s contribution to EPF and approved superannuation fund is also exempt from tax, hence ignored by the calculator. The employee’s contribution to EPF and approved superannuation fund is entitled for the section 80C benefit and therefore to be entered in “Expenditure / Savings” head of the TDS calculator.

9. Although certain specified donations u/s 80G can be considered by the employer at the time of TDS salary calculations, but this TDS salary calculator ignores them.

10. The TDS salary calculator assumes that there is no DA in the pay package. It also assumes that no part of the tax is borne by the employer.

11. Medical insurance premium paid by the employer is completely exempt and hence ignored.


I’ll be grateful if you give me your opinion regarding the working (in particular the shortcomings noticed by you) of the TDS calculator so that I can make suitable amendments in the next version of the TDS salary calculator.


Also see:

1. Tds salary - faqs
2. Tax calculator: FY 09-10
3. 10 practical tips to save tax

What is the right time to buy a home?

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The following question was asked by Shashaank in the comment section of the post: 8 tax considerations to know before investing in property.

I have around 15 lacks in hand...is buying property with added loan the best decision, i pay around 40k income tax per annum apart from declaring 1 lack under 80c.My age is 25 and i am open to any other kind of investment.

Here’s the reply:

Shashaank,

Yours is a typical case of the classic dilemma (to buy or not to buy a house) faced by every young men with a bank balance of a few lakh rupees. Conventional advice is to buy a home early in life. But as usual I can only offer unconventional wisdom.

From what I can gather from your comment, all you have is Rs 15 lakh and you want to invest the entire savings to buy a house and financing the balance with a home loan. May be you think that property is a great investment (amazing returns without any accompanied risk) or, it might be that you want to avail tax breaks available on the housing loan in addition to saving rent (rent is a waste of money!) or probably the temptation is due to current low rates of interest (teaser rates) available on home loans.

Please don’t make such a mistake. You’re very young and I don’t think you should be in such a hurry to buy a house. Following points needs consideration before you arrive at a decision:

1. Return on property investments: A lot of people remain under the impression that property is a great investment just because land is the only asset with a limited supply on the earth and till we’re able to discover another habitable planet, the land prices can go only in upward direction.

Another related wider misconception is that property investment is lot easier (just approach a property dealer) and safer (no downside risk) than other asset classes like equities and mutual funds.

May be that they have never heard of US housing bubble. Understand that property as an asset class behaves in similar fashion to other asset classes like equities, gold and commodities. Put another way, real-estate market also moves in cycles (boom-and-bust) just like stock markets (what goes up must come down!).

2. Tax breaks on home loans will no more be available in future if DTC (direct tax code) is implemented in its current form.

3. Interest is an additional cost borne by you. Further, there are lots of other indirect costs associated with buying a house e.g., brokerage, loan processing fees, stamp duty and registration, municipal taxes, maintenance charges, repair charges, loan insurance charges and house insurance charges which significantly impact your true cost of ownership of a house.

4. Unlike other asset classes investing in property has long term implications.

5. Real estate is the most illiquid asset. Ask yourself following questions: What if there’s an emergent need for funds in the future? What if there is another recession and a salary cut? Or, what if you face a job crisis in future due to any other reason? What if there’s a significant drop in the real estate prices and the lender invokes “Depreciation of security” clause? What if interest rates rise and there is downturn in property prices at the same time? What if you have to change the city due to transfer or change of job?

6. You’ve not mentioned the value of the house and / or the amount of borrowing you’re planning. But let me tell you that excessive debt is not good. It is considered risky to borrow money to invest in stocks but not in property. Why? Isn’t it a case of financial leverage when we borrow money to invest in property? Don’t we also say that companies with debt on their balance sheets are more risky than the others? The point to note is that excessive leverage is bad irrespective of the purpose.

It is better to finance an asset out of your current savings rather than future income. Do you know the main cause behind US subprime crises? Although banks are ready to finance even up to 80-85% of the property value (in fact, lenders often encourage you to go for the maximum possible loan amount), it is always prudent to restrict your debt exposure to lowest possible level, in any case not more than 40-50% of the value of the asset and 50% of your net monthly savings (your take home pay less your monthly expenses). The purpose is to continue savings and investing to meet other financial goals and also keep a buffer for unexpected expenses & life style inflation.

Furthermore, as almost all banks and hosing finance companies are currently offering teaser loans so one has to also keep a safety margin for the imminent future increase in the EMI. So first understand how much loan you can really afford over a period of 20-30 years? You can calculate your loan affordability (& not eligibility) based on the maximum EMI you can afford to pay (as discussed in the previous paragraph) assuming a rate of interest around 2-3% more than the rate you are currently offered by using Loan affordability calculator.


No doubt, it is the dream nurtured by every young man to own his own house at the earliest. But as the above analysis shows it is better not to make this most important investment decision in a hurry and take adequate safeguards to reduce the likelihood of decision backfiring on you later.

Finally, it’s not about real estate vs. equities. In other words, the point of discussion is not whether investing in real estate is better than equities / other asset classes or vice versa. These are both different asset classes having their own pros & cons. The point is one should first have some investments in other asset classes, then buy a house for living (& not investing) as per your needs (& not wants), and after that even if you got some extra money, you might think of investing in real estate.

So Shashaank, first have some comfortable savings level. Your first priority should be to build a healthy investment portfolio by investing in debt (PF, PPF, NSC, Bonds, NCDs, Debt funds), equity (direct investing / diversified equity funds, index funds, ETFs) and gold based on your financial goals, risk profile and time horizon and then after some years you can go for your dream house. Remember—Buy in haste, repent in leisure.

In a nutshell, buy a right house at the right time and for the right purpose.

Do you agree? Please don’t forget to tell me about your decision.


Also see:

1. Housing Loan Queries
2. Why do you need a savings plan?

How to Invest in Bank Fixed Deposits (FDs): Practical Tips (#1)

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Bank fixed deposits (FDs) are favorite choice for parking your funds due to safety of capital and assured / guaranteed returns. Other reasons for their popularity are familiarity and dependability.

No doubt, bank FDs are best for parking your short-term temporary cash. For long term investment one has to take a call based on the interest rate scenario. But solely relying on FDs is not a prudent choice due to plethora of other debt / fixed income instruments available for investment.

However, if you’re already investing in fixed deposits (FDs) of banks or would like to invest in future you should at least be aware of certain tips and tricks to make the most of your money invested in fixed deposits.

Fixed Deposits (FDs) of banks are no more a passive investment instrument which didn’t require a much thought. There is a lot of scope for planning while investing in them.

How to Invest in Fixed Deposits: Practical Tips
Here’s a list of a few tips to know while investing in bank fixed deposits:

1.Have an on-line bank account
Know that in this era of online banking, you’re no more required to walk into a branch to open a FD. With the net banking facility offered by banks, investing in FDs is quick, simple and hassle free. You can do it sitting at your home or office.

Once you sign-up for net-banking, operating your bank accounts including investing in FDs becomes quite easy and convenient.

2.Have multiple Bank Accounts
Second, it is very important that you should have bank accounts in at least 2-3 different banks due to following reasons:

i). To avoid TDS
It can help you avoid TDS provisions. TDS @ 10% is applicable on bank FDs if the total interest earned during the year exceeds Rs 10,000 per bank branch.

ii). To take advantage of differential interest rates among banks
Usually, there is some variation in FD rates across different banks. But sometimes the interest rates can vary a great deal between different banks for deposits of similar tenure.

iii). To increase the insurance coverage of your bank deposits
Suppose you’re having around Rs 6 lakh in a single bank held across various accounts such as saving deposits, fixed deposits or recurring deposits. Now, instead of relying on just one bank, if you spread your deposits across say, 3 banks, your insurance coverage will also triple (i.e., increase from Rs 1 lakh to Rs 3 lakh).

No doubt having multiple banks is a very good idea; however, please don’t go overboard and open too many accounts. Have at the most 3 accounts because the more the number of accounts, more the complexity and it can become a hassle to operate and manage them in the long term.


3. Don’t let your money idle away in saving / current accounts
Minimum tenure of bank FDs is usually 7 days. Although, usually rate of interest offered on deposits for 7-14 days and 15-29 days is less than 3.5% which is offered on savings bank account, still it makes sense to transfer the excess funds to FDs rather than letting them lying down idle in saving or current account. Why?

Let’s say you receive a credit of Rs 2 lakh in your saving account on, say, 5th of the month, but you’re going to require the funds before the end of the month (assuming there are no more credits in your account during the month). So, although the amount gets deposited in your savings account before the 10th but since it won’t be there in your account till the last date of month, you won’t receive any interest on it. So the better alternative is to transfer the funds to a fixed deposit account. Suppose, you require the funds on, say, 26th of the month, here you can open a FD for 20/21 days. Let’s further assume that your bank offers you an interest rate of 3% on this FD. So, earning an extra amount of Rs 329 in a month on Rs 2 lakh is not a bad idea, if you’ve to spend just 2 minutes for it. And depending upon the idle money lying in your savings account, this can be even greater.

Similarly, money idling in your current account should be invested in short term deposits because there is no interest on the balance lying in a current account.

However, you won’t be required to do this financial jugglery for saving accounts from next financial year (i.e., w.e.f. 1st April, 2010) as per RBI circular issued in April 2009.

4. Consider Recurring FDs
If you’re a regular investor in FDs, you should also contemplate investing in bank recurring deposits because they offer many advantages over regular FDs: investment in smaller denomination, no TDS, and disciplined investing. Recurring deposits of banks are like Systematic Investment Plan (SIP) of mutual funds.


For other tips about investing in bank fixed deposits, wait for part-2.


Also see:

1. Interesting Interest Information about Bank FDs
2. Taxation of Interest on Bank FDs
3. Bank FDs of a Deceased Person