Given the above, the fixed deposits don’t offer any significant benefits to taxpayers in 30 per cent or higher slabs.
“Fixed deposits are a great instrument with guaranteed returns and low risk. They offer great benefits for people who want a certainty of return. However, they have never been a great instrument for beating inflation, especially for those in the higher tax bracket. While the interest rates closely track the inflation rates, i.e., the interest rates rise when the inflation increases and vice versa, after considering the tax impact, the net interest earned is always lower than the inflation,” said Ankit Jain, Partner, Ved Jain & Associates.
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“Banks are not under pressure to increase FD rates as they are able to comfortably attract deposits from investors despite the lower post-tax returns. The behavioural comfort of investors with guaranteed returns, the simplicity of the product and the safety factor (up to Rs 5 lakhs insured by RBI) works in favour of FDs,” said Arun Kumar, VP and Head of Research, FundsIndia.
Investors can opt for A-rated corporate bonds
A-rated corporate bonds: Many A-rated corporate bonds can provide a 10-11% annual yield compared to 7-8% annual interest on FD.
“If an investor in the 30% tax bracket invests Rs 10 lakh in a bank FD that fetches 8% per annum interest, her earnings would be Rs 80,000. Post-tax, the earnings will further reduce to Rs 56,000. If she invests the same money in an A-rated corporate bond that yields 10% annual coupons, she can earn Rs 1 lakh at the end of the year, and her post-tax earning would be Rs 70,000. Thus, she can earn Rs 14,000 as her risk premium. However, corporate bonds are illiquid and bear credit and interest rate risk. Thus, a retail investor should not use them as a replacement for emergency funds or any other short-term needs,” said Ajinkya Kulkarni, Co-Founder and CEO, of Wint Wealth.
Other options as per Jain