When we think of risk free returns, Fixed Deposit is one of the major names that come in our mind. A very simple reason is fixed returns and no default in payments. But how many of us ever think or care about the losses we are incurring?
If you have invested in Fixed Deposit and thinking that your returns are safe and high, just think about two things, inflation and tax rate. If you think your money should grow, you must get a return that is higher than inflation rate.
For example – If inflation rate is 8% and your tax bracket is 20%; your tax-adjusted interest rate must be above inflation. Now let’s say, you earn 9% interest rate and invest Rs. 1,00,000, your tax adjusted interest rate will be Rs. 7,200. (Not considering Education cess) It means you earned 7.2% return while inflation rate is 8%. You actually lost 0.8% value of your money.
If you get this point, you may understand what importance it keeps especially for those who are in 20% or even higher 30% tax bracket. Here are some options to consider if you really want a worth of your money.
The option of Debt fund is little beneficial than Fixed Deposit. You get similar returns and pay taxes but the way taxes are calculated, it’s beneficial. However, if your investment is for more than one year, then only you will get differentiated benefits.
If you fall in high tax bracket, Section 80TTA has something for you. If a saving account can give you a higher percentage than inflation, it’s worth considering. This section provides tax free interest on savings account if the total interest for a year is less than Rs. 10,000. So it’s easy to park a good sum of money without falling in any tax trouble.
A good place to park your money is provident fund. While PPF provides 8.7% return, EPF gives 8.5% return. All of them are tax free incomes and the most beneficial; you get them exempted under section 80C.
Tax Free Bonds
If your Fixed Deposit is not paying above inflation, it is good to consider tax-free bonds especially available for retailers. That would give you return between 7-8% and the income is completely tax free.
A risky but high return investment is corporate deposit. They provide a high return than Fixed Deposit. You just need to check the company’s record and know the ratings their issue offer has received. A good grade means you have less risk.