Tax-saver fixed deposits (FDs) are a preferred investment instrument for many people, especially the senior citizens, as they offer the dual benefits of tax saving and guaranteed income.
In the latest monetary policy committee (MPC) meeting on April 6, 2023, the Reserve Bank of India (RBI) kept the repo rate unchanged against the speculation of a 25 basis points (bps) hike.
Does this mean the interest rates that have been moving up for the past 11 months have peaked and would not rise further? In that context, RBI has kept the door open, leaving speculation for a hike or no hike until the next meeting in June 2023.
But for depositors who were looking for an increase in rates on their deposits, the MPC announcement has dampened their spirit.
In this context, are tax-saver FDs a good option for senior citizens now?
The tax saver FDs are not regular fixed deposits where one can withdraw money prematurely after paying the penalty. These FDs do not allow premature withdrawal. They offer regular income on a monthly, quarterly, half-yearly, or annual basis. Also if one opts for the reinvestment option, interest is given at the end of the lock-in period with the benefit of compounding interest.
Until now, tax benefits and guaranteed returns made them popular, but senior citizens must remember that the interest earned on these FDs is taxable as per their tax slab. So, if one falls in the highest tax bracket, the actual returns from these FDs is less.
Says Amol Joshi, PlanRupee Investment Services: “There are several products that offer tax exemption under Section 80C, and FDs are one of them. The first is that the interest earned on these are taxable in the hands of the senior citizens, the second is that they come with a lock-in of five years. So, those in the higher tax bracket should probably try to mix and match products.”
Taxation is an important factor to consider while making decisions for long-term investment. For the seniors who do not fall in the taxable category, fixed deposit returns would not make much of a difference, but for those falling in the 30 per cent income tax bracket, the taxable interest on fixed deposits may not be not be a viable choice.
Tax saver FDs are attractive to those who opt for the old tax regime to take benefit of Section 80C for saving tax, but this benefit doesn’t exist in the new tax regime.
In this case, for senior citizens seeking regular and guaranteed income, fixed deposits can offer them a fixed guaranteed return, which is currently around 7-7.5 per cent in many banks for deposits with a fivee yar lock-in. For instance, Punjab National Bank’s tax-saver fixed deposit offers a rate of interest of 7 per cent, while ICICI Bank’s tax saver FD offers 7.5 per cent.
Booking a fixed deposit at a higher rate for the long term is a good idea, but nobody can say whether this is the peak rate.
On the time horizon side, if the asset allocation is heavily towards debt or fixed income, then one can consider investing in equity-linked saving schemes (ELSS) where the lock-in period is less, and the return under long-term capital gain (LTCG) is not taxable up to Rs 1 lakh, and beyond that, it is only 10 per cent.
Finally, the lock-in period, requirement of funds, and risk capacity should be considered while selecting a tax-saving instrument. If tax saving is not a requirement, the major points to consider for senior citizens should be the time horizon and secure return.