Good Afternoon Friends!
a. Alternatives to Bank Deposits - Debt funds ..
The demonetization and the various initiatives by our government to move the economy into a less-cash economy has opened up the door to investing in instruments other than bank fixed deposits which even today account for a bulk of the financial savings.
Although on a reducing curve, bank deposits account for 43.5 % of the household financial savings as per the RBI Annual Report for 2015-16 as against 55.8% in 2013-14.
The two major reasons for switching over to debt funds are:
a. The tax arbitrage, i.e., your in
vestment in a
debt fund, if held for more than 3 years will be taxed at 20% with indexation.
The example below will clarify this:
Investment Amount: Rs 10,00,000
Investment In: Bank Deposit Debt Fund
Rate, of Interest 6.95% 9.0%
Maturity Amount, Rs 12,23,326/- 12,95,029/-
Interest Earned, Rs 2,23,326/- (A) 2,95,029/- (B)
Income adj. for Inflation n.a. 96,946/- (C)
Taxation (30% slab), Rs 66,998/- (D) (30% of A)
Taxation (20% after indexation), Rs 19,389/- (E) (20% of C)
Net Income, Rs 1,56,330/- (A- D) 2,75,640/- (B - E)
% Higher Return as compared with a fixed deposit, post tax: 76.3%
Please note: 6.95% is the 3 year fixed deposit rate of SBI and 9% is the return of a given debt fund.
b. The second reason is that in case of Bank Deposits or any deposits for that matter the accrued interest whether received or not, has to be declared as one's income for the financial year. This is not the case with Debt funds.
How does one go about doing this: There are multiple types of debt funds varying according to the duration of investing, the instruments being invested in, the lock-in or otherwise.
Please con
s
ult you Investment Advisor before investing in any scheme.Regards
Anil