Investing in FDs, RDs is a time-tested practice. However, one needs to understand the finer contours of making such investments
Low-risk investors prefer FDs, RDs to MFs
Suitable for those content with moderate but assured return
Factor in short-term financial goals, liquidity while choosing FDs, RDs
Despite the rising popularity of mutual funds, fixed deposits (FDs) and recurring deposits (RDs) remain the most trusted investment instruments, especially among low-risk investors who are content with moderate, but assured returns.
FDs and RDs guarantee principal repayment as well as interest income at booked interest rate, irrespective of any changes in the card rate during their tenure.
Despite their popularity, many investors are still unaware of some of the most crucial facets of FDs and RDs. Here are some facts that every RD and FD investor needs to know:
Covered under insurance
Deposit Insurance and Credit Guarantee Corporation (DICGC), a subsidiary of RBI, offers deposit insurance cover to the banks included in the Second Schedule of the RBI Act.
As per the depositor insurance programme, each depositor is insured up to ₹1 lakh in case of bank failure. The programme covers both interest and principal component of FDs and RDs along with deposits held in savings and current accounts. Moreover, the ₹1 lakh cover applies separately to deposits held in each bank.
Hence, risk-averse investors can benefit from high-yielding fixed and recurring deposits by distributing their FD and RD investments of up to ₹1 lakh across multiple banks.
FD, RD income taxable
Banks deduct TDS at 10% when the interest income from FDs or RDs exceed ₹40,000 (₹50,000 in case of senior citizens) in a financial year.
In case you do not provide your PAN details to the bank, they deduct TDS at 20%.
However, your tax liabilities don’t end with TDS. FD and RD interest income is taxable as per the tax slab of the depositor, except for tax deduction of up to ₹50,000 available to senior citizens under Section 80TTB.
The difference between the actual tax liability and TDS amount deducted is adjusted at the time of filing tax returns.
Always factor in your tax slab while calculating post-tax return from FDs or RDs.
This will help you to make the correct comparison between the returns from FDs/RDs and alternative investment instruments such as debt and hybrid mutual funds.
Most people open FDs or RDs based on the highest card rate without considering their short-term financial goals and liquidity requirements.
Unforeseen emergencies or overlooked financial goals can propel them to withdraw their FDs or RDs prematurely. This may lead them to incur premature withdrawal penalty, usually about 1%, on closing the FD or RD account.
The penal rate is subtracted from effective rate of interest, which is usually the lower of original card rate or the card FD or RD rate for the period the FD or RD has been in effect.
Hence, factor in short-term financial goals and liquidity while choosing your FD or RD tenure to avoid unnecessary premature withdrawals and loss of interest income.
May not save tax
Many open FDs or RDs in the name of their spouse or children having lower or nil income in the hope of saving tax. However, doing so may not save you tax as the interest earned from FDs or RDs opened in the name of your non-working spouse or minor child will be added to your income and taxed as per your tax slab.
But, if parents club their minor child’s income, they will be allowed tax exemption of ₹1,500 per annum per minor child. Interest income from FDs or RDs opened in the name of your parent or major child will not be clubbed with your income.
Interest not tax-free
Tax-saving bank FDs of up to ₹1.5 lakh per financial year qualify for tax deductions under Section 80C.
However, these tax-saving FDs come with a lock-in period of five years. Interest earned will also be taxed according to your tax slab, which can reduce your post-tax returns.
Instead, invest in Equity Linked Saving Schemes (ELSS) to save tax and simultaneously generate higher returns for investment horizons of five years and more.
ELSS have the lowest lock-in period of just three years among all Section 80C options and usually outperform FD returns by a wide margin over the long term. ELSS is also more tax-efficient as their gains booked beyond ₹1 lakh per year attract LTCG (long term capital gains) tax at 10%, irrespective of your tax slab. However, gains booked from ELSS and other equity investments less than ₹1 lakh in a financial year will remain tax free.
(The author is CEO and co-founder, Paisabazaar.com)
Every motorised vehicle must be insured against third party liability
Green signal: All general insurance companies offer motor policies for all classes of vehicles. Getty Images/iStockRidofranz
Motor insurance has been in the news all month and it’s time for anyone who owns a vehicle to know all about it.
Under the provisions of The Motor Vehicles Act, 1988, any motorised vehicle operated on public roads should be insured against third party liability.
What is third party liability? The vehicle owner is the first party, the insurance company they buy the policy from is the second party, and anybody who faces a loss due to the actions of the former while operating the vehicle is the third party.
When a vehicle causes death, bodily injury or property damage or loss to someone, they can seek legal compensation and it is the liability of the former who has to pay it.
Under the law, this liability is unlimited in the case of death of injury, and hence, it is mandatory you purchase a Motor Third Party Liability Policy (TP Policy).
This legislation was created in the 1930s with a view that victims of motor accidents should not go without compensation owing to the financial capacity of the first party.
All general insurance companies offer motor policies for all classes of vehicles. Let us see the policy for private cars to understand the scope of the cover.
The Private Car policy has two parts. The first is the Motor Third Party Liability Policy (also called Act Only policy), which covers you for what is discussed above and includes personal accident cover for the owner/ driver.
The second is called Comprehensive Policy and is a package of the TP cover and insurance for Own Damage, that is damage to your vehicle. The latter also covers theft of your vehicle and other risks. The TP liability policy covers you for an unlimited amount in respect of death or injury. In the case of damage to third party property the cover is up to ₹7.5 lakh. (for a scooter or motorcycle, it is ₹1 lakh.)
The TP liability premium is fixed by the Insurance Regulatory and Development Authority of India (IRDAI).
In the case of a private car, if your car does not exceed 1,000 cc, your standard TP liability premium will be ₹2,072, ₹3,221 for cars above 1,000 cc but not exceeding 1,500 cc and ₹7,890 for cars above 1,500 cc. GST will apply.
Carry your documents
The amended Motor Vehicles Act, 1988 that came into force from September 1, 2019 has specified much higher fines for violations.
Apart from wearing your seat belt or helmet and following traffic rules, what you have to do is carry your driving licence, registration certificate (RC) of the vehicle, vehicle insurance policy and pollution under control (PUC) certificate.
All these can be carried in digital form in the Digilocker app. Once you create an account and link your Aadhaar number, you can pull in your driving licence, RC and insurance policy (but not the PUC yet). However, if you can’t pull in the insurance policy, check back with your insurer as there may be a discrepancy between your name as spelt in your Aadhaar and in the insurance policy. They will help you with it.
If you are driving a car not registered in your name, opt for the mParivahan app where you can search and save the RC of the vehicle you are driving.
You will need the registration number and chassis number of the vehicle to do this.
mParivahan does not help you with the insurance policy, though.
(The writer is a business journalist specialising in insurance & corporate history)
What is a consolidated account statement?
Consolidated account statement or CAS is a single combined statement that shows all the mutual fund investments done by an investor in a month.
An investor may be investing in different mutual fund schemes across various asset management companies (AMCs) and a CAS would show the investor all his investments in one single statement. CAS is an important document for an investor as it provides a snapshot of all ongoing investments and has the details regarding the total number of units and the systematic investment plans (SIPs), among other things.
Why is a CAS needed?
Investors are increasingly using the direct route for investing in mutual funds. Direct route means that investors are investing directly through the fund houses and not through a distributor. Typically, investors invest through 4-5 schemes across different fund houses. While each fund house sends a statement to the investor, it would include details of investments made only through that particular AMC.
Managing such statements from different AMCs could be a cumbersome task and hence CAS helps the investor in seeing all the investment details in one place. A CAS helps an investor to monitor the investments in a much more efficient manner and also aids in better financial planning.
Does CAS include all MF investments?
A CAS would include all the folio details of an investor on the basis of his or her Permanent Account Number or PAN. When an investor starts an SIP or makes any kind of investment in a mutual fund, the PAN details have to be submitted. Based on PAN, a CAS is able to include details of all the investments.
Incidentally, this makes it very important for investors to ensure the correct PAN is mentioned at the time of making a fresh investment in mutual funds.
How can one get CAS?
Investors can get CAS through entities like CAMS or Karvy that provide such services. The process is completely online and the investor has to only register on the site by providing basic details such as PAN and email details.
Thereafter, one can get a soft copy of the CAS. There is also the option of viewing a summary statement or a detailed one as well. Typically, the statement that is emailed is password protected for added security. An investor can also ask for a hard copy of the CAS, if needed.
Q. I am a 48-year-old married person, employed in a private school as a teacher. I earn ₹22,000 per month, including provident fund contributions. My child is in the eleventh standard and is pursuing IIT tuitions costing ₹13,000 a month. I want to save some amount for his future, most probably after 12th, when he gets into a college. I don't want him to compromise on his career because of financial problems. I have provident fund savings (of about ₹3 lakh) which I want to save for my retirement. My husband takes care of household expenses and car EMIs (₹10,000 per month). His monthly earning is ₹25,000. I have two unmarried daughters of 24 years of age who are about to start their careers very soon. We have a shop worth ₹10 lakh which we have given for rent. Please suggest us some ways to make our lives easy and sustainable. I thought of paying my son's coaching fee for one year with my PF amount. Where can I invest my salary of ₹2,20,000 for better savings after one year?
A. While we understand your anxiety about providing your son with a good education despite financial constraints, the tuition fee of ₹13,000 per month that you’re shelling out towards IIT coaching appears quite high.
With such a high outgo towards coaching for two years, you will have very little room for any additional savings towards his college education.
If your son gets into a good institution like the IITs, you should ideally encourage him to take an education loan to fund his college degree so that you don’t have to dip into your provident fund, which is meant for your retirement.
The loan can be repaid out of his income once he gets placed. Do note that the decision to take the loan will depend on the quality and placement prospects of the institution he gets into. It may not be worth taking a loan for admission into second-rung engineering colleges where placement prospects are not certain.
Your current provident fund balance of ₹3 lakh is extremely low and will not allow you to retire at 60, as you will not be able to earn sufficient regular income from investing it. To retire comfortably, you need to have at least 25 times your annual expenses (at the time of retirement) in your retirement fund.
Your living expenses will also rise a lot due to inflation between now and the time you turn 60.
To illustrate, if you currently spend ₹30,000 a month as a family, at a 6% inflation rate, you’ll need ₹60,000 a month to maintain the same standard of living 12 years later. Based on this, the amount of money you’d need in your retirement fund would be ₹1.8 crore.
Given the very small sum you currently have, it would be quite inadvisable to dip into it for any purpose. With your financial constraints, it would have been best to avoid borrowings to acquire depreciating assets such as cars. In future, strictly avoid EMIs. You and your husband should be saving at least 30% of your salaries towards future goals such as retirement and investing the rent received.
We would advise you to open a PPF account and maximise your investments in it. You can also start ₹5,000 SIPs in a Nifty100 index fund to earn an inflation-beating return on your retirement savings.
To ensure your son’s financial future is not disrupted in in any way, it would be good for you and your husband to take a plain term insurance cover. You also need health insurance so that your finances are not suddenly impacted by ill health. Perhaps your daughters can cover you both in a floating rate insurance once they commence their careers.