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Wednesday, February 20, 2013

How your savings account can beat FDs (Fixed Deposits)



In the last budget a new provision was introduced in the union budget (under section 80 TTA) which exempts interest earned up to Rs. 10,000 Rs. from saving bank accounts for individuals and HUFs.
A few banks like Yes bank, Kotak Mahindra bank and Indusind bank are giving interest on saving accounts in a range of 6-7 % on saving accounts for an account balance above Rs. 1 lakh.

Let’s see how one can be benefitted from this provision?

Mr. Verma and Mr. Sharma both worked for the same firm where both of them got a performance reward of Rs. 1.4 lakh. 
Mr. Verma opened a saving account with a private bank which offered a coupon rate of 7% to deposit the amount while Mr. Sharma opened an FD account with the reward-amount which offered him a coupon rate of 9 %.
Mr. Sharma jeered Mr. Verma boasting how his is earning 2 % higher return.

What do you think, who played smart?

Prima-facie, it appears Mr. Sharma played it smart as he is getting a higher return.
But wait, post-tax things changed dramatically.
Mr. Verma did not have any significant amount in his previous saving bank account and hence his interest earned on saving accounts was below Rs. 10,000 and thus became completely tax-exempt.
As interest on FDs is fully taxable, post-tax Mr. Sharma’s return was reduced to just 6.3 %( after 30 % IT deduction).
Post-tax, Mr. Verma got .7 % higher return than Mr. Sharma.

What is the significance of section 80 TTA?

We have seen how Mr. Verma availed the benefits of section 80 TTA by depositing Rs. 1.4 lakh in a saving account which offered a coupon rate of 7%.
What is intriguing to see how much return a Fixed Deposit should offer so that post-tax return should be same as what Mr. Verma got; and the answer is whopping 10 % and at present no bank is offering that much return on FDs.
Morale of this story is- for smaller amounts one should avail 80 TTA efficiently so that post-tax returns from saving account could beat the FD returns.

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