Description
Program designed to encourage savings through small but regular deposits or automatic deductions from salaries or wages.
Saving Schemes In India
Savings has an important place in the mobilization of resources for development expenditure because the investors would not only get back their money ,but also some interest and they would therefore prefer to lend money in this way instead of paying it as outright tax. Further in a developing economy in which there will be always surplus money available with some sectors to the extent that the savings are tapped the money available for circulation is taken away and to that extent pressure on prices and inflationary trend is reduced. So therefore savings have got a very important role to play in the sphere of economy. Various saving schemes framed by Central Government under: • • • Government Savings Bank Act, 1873. Government Saving Certificates Act, 1959. Public Provident Fund Act, 1968.
Features Of Saving Schemes In India • • • • • • Risk Free Investment as Small Savings Schemes are fully secured by GOVT.OF INDIA. Higher rate of interest. Invest Rs. 5000/- or more in any Small Savings Scheme(except Savings Bank a/c and DSRGE) to get Lucky Coupon and Win fabulous prizes. Tax on these prizes will be paid by the State Govt. Nomination facility. Amount invested will be utilized for the development of the state. Govt. authorized Small Savings Agents are providing home service to all the depositors of these schemes.
Following are the saving schemes in India. •
Post Office Saving Scheme.
The main financial services offered by the Department of Posts are the Post Office Savings Bank. It is the largest and oldest banking service institution in the country. The Department of Posts operates the Post Office Savings Scheme function on behalf of the Ministry of Finance, Government of India. Under this scheme, more than 20.50 crores savings account are operated. These accounts are operated through more than 1,54,000 post offices across the country. The Post offices provide a number of savings schemes like the Savings Account Schemes, Recurring Deposit Schemes, Time Deposit Schemes, Public Provident Fund Schemes, Monthly Income Schemes, National Savings Certificates, Kisan Vikas Patras, and Senior Citizens Savings Scheme. A brief of the various schemes is as follows:
Scheme
Interest Rates
Tenure
Post Office Savings Account
3.5% p.a. On No individual specific and joint or fix account tenure
Investment Denominations and limits Min: Rs. 50 Max: Rs. 1 lakh for individual and 2 lakhs for joint account
Salient Features
Tax rebate
Cheque facility available
Interest is tax-free u/s 80L
5 years. 5-Year Post Can be Min: Rs. 10 per Office 7.5% renewed month or multiples Recurring compounded for of Rs. 5 Max: No Deposit quarterly another 5 limit Account years 6.25% 6.50% 7.25% 1 year 2 years 3 years
Post Office Time Deposit Account
7.50%
5 years
Post Office Monthly Income Account
8% p.a.
6 years
One withdrawal up to 50% of the balance is allowed after one year. Full maturity value No tax rebate allowed on R.D. 6 & 12 months advance deposits earn rebate. Long-term accounts could be closed after 1 year for discounted Investment interest. Accounts qualifies for Min: Rs. 200 and its could be closed after 6 deduction u/s multiple thereof months but before a 80C. Interest Max: No limit year for no interest. is tax-free u/s Interest is calculated 80L quarterly but payable yearly. Account if closed after 1 year but before 3 Min: Rs. 1500 per years will suffer a month or multiples deduction of 2% of the of it.Max: Rs. 4.5 deposit. Account if Interest is lakhs for individual closed after 3 years will tax-free u/s account and Rs. 9 suffer a deduction of 80L lakhs for joint 1% of the deposit. On account maturity, bonus of 5% on principal amount is admissible
Withdrawal can be Min: Rs. 500 in 1 made every year after 15-year year Max: Rs. 70000the 7th financial year. 8% p.a. Public 15 years in 1 year Deposits From the 3rd financial compounded Provident tenure can be made in year, loan can be yearly Fund Account lump-sum or 12 availed against PPF. installments No attachment under court decree order.
Investment qualifies for deduction u/s 80C. Interest is tax-free u/s 80L
8.4% compounded yearly. Kisan Vikas Money --Patra doubles in 8 years and 7 months
No limits. Investment denominations available are of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000, Rs. 10,000, in all Post Offices and Rs. 50,000 in all Head Post Offices.
A single holder certificate can be purchased by an adult. No tax A certificate can also benefits be purchased jointly by two adults.
National Savings Certificate (VIII issue)
8% p.a. compounded half-yearly 6 years but payable after maturity
Min: Rs. 100. Also available in denominations of A single holder Rs. 100/-, 500/-, certificate can be 1000/-, 5000 & Rs. purchased by an adult. 10,000/-. Max: no limit
Investment as well as the interest deemed to be reinvested qualifies for deduction u/s 80C.
Senior Citizens? Savings Scheme
9% p.a.
5 years
Age should be above 60 years or 55 years above if retired under superannuation. Account if closed after Only 1 deposit Investment 1 year will suffer a allowed in multiple qualifies for deduction of 1.5% of Rs. 1000. Max is deduction u/s interest and after 2 Rs. 15 lakhs 80C. years will suffer a deduction of 1% interest. TDS is made on interest if it exceeds Rs. 10000 p.a.
The silent features of the current schemes are given below: • • • National Savings Certificates (NSC) National Savings Schemes (NSS) Post Office Time Deposite
• • • •
Post Office Recurring Deposit Account (RDA) Post Office Monthly Income Scheme Senior Citizen Scheme Kisan Vikas Patra (KVP)
•
Company Fixed Deposits.
It’s not just the banks that offer a fixed deposit these days. Even Non-Banking Financial Companies (NBFC) offer fixed deposits. Company fixed deposit (CFD) is a deposit with financial institutes and NBFCs for a fixed rate of return over a fixed period of time. The rate of interest is determined by the tenure of the deposit as well as other factors. The deposit made in a CFD is governed by section 58A of the Companies Act. CFDs are a good option for investment as they provide higher rate of interest compared to bank deposits. They are a good source of regular income by means of monthly, quarterly, half-yearly, or yearly interest incomes. However, these deposits are not secured like those in the bank. In case of default by a company, the investor cannot sell the deposit documents to recover his amount. The investor has no claim over the assets of the company in case the company is wound-up. This makes CFD a risky option. In order to protect ones investment from the risk, the performance of the company must be reviewed before investing. Also at the time of maturity, if you wish to reinvest your amount, check the company’s performance. Keep a regular check on the companies in which you plan to invest by keeping track of its balance sheet and share prices. This shall enable you to decide your investment in CFD. The NBFCs that offer CFD has to get themselves rated by the rating agencies such as CRISIL, CARE, ICRA etc., but manufacturing firms have no such compulsion. Before you invest in any of the CFDs, check the company’s ratings. A company with the rating of AA is considered a good investment option. Also, checking the previous records of the company in terms of timely interest payments will help in determining which company to invest in. Interest and Returns The interest rates offered in company fixed deposits are higher than that offered by banks. The rate of interest can be in the range of 9-16%. However, higher the interest rate, more risk is associated with it.
Thus, a company offering 15% interest rate would be more risky than that offering 11%. Before investing, ensure that you choose companies that have high ratings. Benefits of Company Fixed Deposits • • • • • • • • • • High rates of interest. Stable source of income. Sufficient safety as most companies are rated. Flexible tenure ranging from 6 months to 7 years. Only 6 months lock-in period High liquidity - issuers offer loan against CFD and pre-mature withdrawal facility No TDS in case the interest is only Rs. 5000 in a year. Nomination facility. Regular interest incomes - monthly, quarterly, half-yearly, or yearly. Simple operational process - PAN not required
Methods for Good Investment If you wish to have higher returns, you must take a little risk. And if you wish to avoid the risk, you must compromise on the returns. However, when deciding for your option for CFDs, it is important to know how to choose a right fixed deposit and how to ignore the wrong ones. Here are a few tips to ensure higher returns with low risk. Spread your risk - Spread your CFDs over a number of companies in different fields. Do not put more than 10% of your investment in 1 company. This will have 2 benefits. First, your risk will be diversified among various industries. Second, the interest from 1 company will not exceed Rs. 5000, and hence there will be no TDS. Right tenure of Deposit - Ideally you must invest for a period of 1-3 years. Blocking your investment for more than 3 years in a CFD could be risky, because the performance of the company cannot be assured for that long period of time. Periodic Review - Periodic review of the company must be done from time to time and at the maturity of the deposit. This will help you to decide whether you should renew or reshuffle the deposit.
•
Bank Deposits.
People generally want high returns on their investment. However they are not ready to take up the risks attached with the returns. In cases of mutual funds and share market, the returns are quite high but the risk associated with it is also very high. Not every person is ready to take such risks. For such people, there are some safe ways of investment. Depositing with banks is one way to have reasonable returns on your investment without a very high risk. The risks with bank deposits are minimal and thus it is ideal for investment and is preferred by a large number of people in India. The banks provide with various deposit schemes to meet different needs of the people. The most popular and common bank deposit accounts are: • • • • Current Deposit Account Savings Bank Account Recurring Deposit Account Fixed/Term Deposit Account
Current Deposit Account: Though this account is not a saving account, yet it is very useful for business people. This account is for businessmen, companies and other institutions that have to make payments through their bank account. Such people have high number of transaction per day and need to make many payments. Savings account does not have such flexibility and thus, is not suitable for business purposes. This makes current account very feasible for business purposes. This type of account provides for unlimited number of transactions and the amount of transaction per day. This type of account would require a certain minimal deposit at the time of opening of the account; the minimal deposits vary from bank to bank. Also, no interest is paid on the deposit made in current account. However, one major benefit is that bank allows you to withdraw more money than in your account. This is called overdraft facility. This facility is available to certain clients up to certain limit of amount. Savings Bank Account: The most commonly adopted form of saving for an average man is a banks savings deposit. It is ideal for people with limited income who wants to save money for future. The account could be opened as individual or joint account. The bank gives interest on the deposits in savings account. The rates of
interest are not very high and vary from bank to bank and from time to time. One can open a savings account with a minimum deposit, generally Rs. 100 to Rs. 500. Initial deposit varies from bank to bank. Money can be deposited at anytime in this account. However, there are restrictions relating the number of withdrawals per day. Generally a person can withdraw money using a withdrawal slip, or by issuing a cheque or through an ATM card. A minimum balance needs to be maintained in this account as prescribed by that bank. Recurring Deposit Account: For people who can save regularly, say every month and who wants to earn a higher interest than savings account shall go for a recurring deposit account. Under this account, a person needs to deposit a fix amount every month for a particular period of time. For example, if a person deposits Rs. 2000 every month for a period of 3 years, the entire amount along with the interest is payable at maturity, i.e. after 3 years. In case the person wants to close the account before maturity, he can do so. The amount and interest till that period shall be payable. This type of account could be opened by an individual person, or jointly with another. The guardian of a minor can open such account in the name of the minor. The interest received in this account is higher than savings account but less than fixed deposit account for the same time period.
Fixed Deposit Account: This deposit is also known as term deposit account. When a person has a good amount to invest but does not wish to go for risky investments, he must choose fixed deposits with banks. Fixed deposits are best for long-term safe investments. Under this deposit, a person saves a certain sum of money for a fixed period of time to earn higher interest on such amount. Interest is calculated on a monthly, quarterly or yearly basis depending upon the scheme of that bank. The deposit is made for a fixed time period ranging from a minimum of 15 days to many years. No withdrawal is allowed during the tenure of the deposit. However, the person could encash the amount before maturity. In such case, the bank charges a penalty and gives lower interest than initially agreed. The interest received on fixed deposit could be withdrawn at certain intervals. At the time of maturity, the depositor can withdraw the amount or renew the account for another time period. Loans could also be availed against the security of fixed deposit. To attract more customers, various schemes with fixed deposit account are offered by banks. Some such schemes are fixed deposit with life insurance, health insurance, instant loan facility, free credit cards etc. • • Saving Bank Account. Bank Recurring Deposit.
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Bank Fixed Deposits
•
Bonds And Debentures In India.
A Bond is a loan given by the buyer to the issuer of the instrument. Bonds can be issued by companies, financial institutions, or even the government. Over and above the scheduled interest payments as and when applicable, the holder of a bond is entitled to receive the par value of the instrument at the specified maturity date. Bonds can be broadly classified into a. Tax-Saving Bonds b. Regular Income Bonds Tax-Saving Bonds offer tax exemption up to a specified amount of investment. Examples are: a. ICICI Infrastructure Bonds under Section 88 of the Income Tax Act, 1961 b. NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act, 1961 c. RBI Tax Relief Bonds
Regular-Income Bonds, as the name suggests, are meant to provide a stable source of income at regular, pre-determined intervals. Examples are: a. Double Your Money Bond b. Step-Up Interest Bond c. Retirement Bond
d. Encash Bond e. Education Bonds f. Money Multiplier Bonds/Deep Discount Bond
Similar instruments issued by companies are called debentures. Features: • Bonds are usually not suitable for an increase in your investment. However, in the rare situation where an investor buys bonds at a lower price just before a decline in interest rates, the resultant drop in rates leads to an increase in the price of the bond, thereby facilitating an increase in your investment. This is called capital appreciation. Bonds are suitable for regular income purposes. Depending on the type of bond, an investor may receive interest semi-annually or even monthly, as is the case with monthly-income bonds. Depending on one's capacity to bear risk, one can opt for bonds issued by top-ranking corporates, or that of companies with lower credit ratings. Usually, bonds of top-rated corporates provide lower yield as compared to those issued by companies that are lower in the ratings.
•
• •
In times of falling inflation, the real rate of return remains high, but bonds do not offer any protection if prices are rising. This is because they offer a pre-determined rate of interest. One can borrow against bonds by pledging the same with a bank. However, borrowings depend on the credit rating of the instrument. For instance, it is easier to borrow against government bonds than against bonds issued by a company with a low credit rating. There are specific tax saving bonds in the market that offer various concessions and tax-breaks. Tax-free bonds offer tax relief under Section 88 of the Income Tax Act, 1961. Interest income from bonds, upto a limit of Rs 9,000, is exempt under section 80L of the Income tax Act, plus Rs 3,000 exclusively for interest from government securities. However, if you sell bonds in the secondary market, any capital appreciation is subject to the Capital Gains Tax. bonds are rated by specialised credit rating agencies. Credit rating agencies include CARE, CRISIL, ICRA and Fitch. An AAA rating indicates highest level of safety while D or FD indicates the least. The yield on a bond varies inversely with its credit (safety) rating. As mentioned earlier, the safer the instrument, the lower is the rate of interest offered.
•
•
Assurance In Bonds: This depends on the nature of the bonds that have been purchased by the investor. Bonds may be secured or unsecured. Firstly, always check up the credit rating of the issuing company. Not only does this give you a working knowledge of the company's financial health, it also gives you an idea about the risk considerations of the instrument itself. This knowledge makes for a better understanding of the available choices, and helps you take informed decisions. In secured instruments, you have a right to the assets of the firm in case of default in payment. The principal depends on the company's credit rating and the financial strength. Selling in the secondary market has its own pitfalls. First, there is the liquidity problem which means that it is a tough job to find a buyer. Second even if you find a buyer, the prices may be at a steep discount to its intrinsic value. Third, you are subject to market forces and, hence, market risk. If interest rates are running high, bond prices will be down and you may well end up incurring losses. On the other hand, Debentures are always secured. Interest payments depend on the health and credit rating of the issuer. Therefore, it is crucial to check the credit rating and financial health of the issuer before loosening up your purse strings. If you do invest in bonds issued by the top-rated corporates, rest assured that you will receive your payments on time.
Risks In Bonds: In certain cases, the issuer has a call option mentioned in the prospectus. This means that after a certain period, the issuer has the option of redeeming the bonds before their maturity. In that case, while you will receive your principal and the interest accrued till that date, you might lose out on the interest that would have accrued on your sum in the future had the bond not been redeemed. Inflation and interest rate fluctuation affect buy, hold, and sell decisions in case of Bonds. Always remember that if interest rates go up, bond prices go down and vice-versa.
Buying, Selling, And Holding Of Bonds: Investors can subscribe to primary issues of Corporates and Financial Institutions (FIs). It is common practice for FIs and corporates to raise funds for asset financing or capital expenditure through primary bond issues. Some bonds are also available in the secondary market. The minimum investment for bonds can either be Rs 5,000 or Rs 10,000. However, this amount varies from issue to issue. There is no prescribed upper limit to your investment-you can invest as little or as much as you desire, depending upon your risk perception. Bonds offer a fixed rate of interest. The duration of a bond issue usually varies between 5 and 7 years. Liquidity Of A Bond: Selling in the debt market is an obvious option. Some issues also offer what is known as 'Put and Call option.' Under the Put option, the investor has the option to approach the issuing entity after a specified period (say, three years), and sell back the bond to the issuer. In the Call option, the company has the right to recall its debt obligation after a particular time frame. For instance, a company issues a bond at an interest rate of 12 per cent. After 2 years, it finds it can raise the same amount at 10 per cent. The company can now exercise the Call option and recall its debt obligation provided it has declared so in the offer document. Similarly, an investor can exercise his Put option if interest rates have moved up and there are better options available in the market. Market Value Of A Bond: Market value of a bond depends on a host of factors such as its yield at maturity, prevailing interest rates, and rating of the issuing entity. Price of a bond will fall if interest rates rise and vice-versa. A change in the credit rating of the issuer can lead to a change in the market price. Mode Of Holding Bonds: Bonds are most commonly held in form of physical certificates. Of late, some bond issues provide the option of holding the instrument in demat form; interest payment may also be automatically credited to your bank account.
•
Equity Linked Savings Scheme.
Equity linked Savings schemes are equity funds floated by mutual funds. They offer a 20 per cent tax rebate on investments upto Rs 10,000 in a given financial year. There is a three year lock-in on investments and there is no assurance on returns. The ELSS funds have to invest more than 80 per cent of their money in equity and related instruments. Returns form ELSS funds tend to fluctuate widely, in line with the performance of the stock markets. Young people should definitely invest in the ELSS funds as
they have the ability to take on higher risk. Ideally one should invest in them when the markets are down. These funds are now open all the year round. Therefore, investors can time their investment. The other way of investing in these funds could be a systematic investment, which essentially means investing a small sum regularly (monthly or quarterly). Features: • • • • • • Individuals, Hindu Undivided Families (HUFs) and companies. The units can be easily transferred by filling out a transfer form. A maximum investment of Rs 10,000 to claim an income tax rebate of 20 per cent. Nomination facility is available with ELSS. Open-ended mutual funds have no maturity period. However, to claim tax rebate under Section 88, the minimum lock-in period is three years. In the case of open-ended schemes, the units can be sold anytime after the initial lock-in period of three years. In the case of closed-end schemes, the units can be sold only on the due date specified.
Tax benefits: Dividends from mutual funds are fully exempt from income tax under Section 10(33). Equity funds (schemes that invest 50 per cent of their funds in equity) are also exempt from dividend tax. ELSSs offer under section 88 tax rebate on investments up to Rs 10,000 in a financial year. The difference between the selling price and the cost price is taxable as capital gains in the year of sale, at 10 per cent or 20 per cent, depending on whether or not you claim indexation benefits. Pluses • • • • • Possibility of high returns Lock-in period of only three years Easy transfer Low tax incidence (10 per cent) on redemption Efficient service, especially in the case of private mutual funds
Minuses • • High risk Difficult to choose the right fund (But not if you use the services of the Matchmaker!)
How to start? It’s a pity that you can only invest up to Rs 10,000 to claim the maximum tax rebate under Section 88. However, stay away from ELSSs if you cannot stomach the risk. You can also consider withdrawing from the PPF scheme and investing your money in tax-saving mutual fund schemes. Of course, you cannot reinvest the money that you withdraw. But you can channel this money towards other financial obligations and invest in ELSSs using your taxable income for the year
doc_598738948.doc
Program designed to encourage savings through small but regular deposits or automatic deductions from salaries or wages.
Saving Schemes In India
Savings has an important place in the mobilization of resources for development expenditure because the investors would not only get back their money ,but also some interest and they would therefore prefer to lend money in this way instead of paying it as outright tax. Further in a developing economy in which there will be always surplus money available with some sectors to the extent that the savings are tapped the money available for circulation is taken away and to that extent pressure on prices and inflationary trend is reduced. So therefore savings have got a very important role to play in the sphere of economy. Various saving schemes framed by Central Government under: • • • Government Savings Bank Act, 1873. Government Saving Certificates Act, 1959. Public Provident Fund Act, 1968.
Features Of Saving Schemes In India • • • • • • Risk Free Investment as Small Savings Schemes are fully secured by GOVT.OF INDIA. Higher rate of interest. Invest Rs. 5000/- or more in any Small Savings Scheme(except Savings Bank a/c and DSRGE) to get Lucky Coupon and Win fabulous prizes. Tax on these prizes will be paid by the State Govt. Nomination facility. Amount invested will be utilized for the development of the state. Govt. authorized Small Savings Agents are providing home service to all the depositors of these schemes.
Following are the saving schemes in India. •
Post Office Saving Scheme.
The main financial services offered by the Department of Posts are the Post Office Savings Bank. It is the largest and oldest banking service institution in the country. The Department of Posts operates the Post Office Savings Scheme function on behalf of the Ministry of Finance, Government of India. Under this scheme, more than 20.50 crores savings account are operated. These accounts are operated through more than 1,54,000 post offices across the country. The Post offices provide a number of savings schemes like the Savings Account Schemes, Recurring Deposit Schemes, Time Deposit Schemes, Public Provident Fund Schemes, Monthly Income Schemes, National Savings Certificates, Kisan Vikas Patras, and Senior Citizens Savings Scheme. A brief of the various schemes is as follows:
Scheme
Interest Rates
Tenure
Post Office Savings Account
3.5% p.a. On No individual specific and joint or fix account tenure
Investment Denominations and limits Min: Rs. 50 Max: Rs. 1 lakh for individual and 2 lakhs for joint account
Salient Features
Tax rebate
Cheque facility available
Interest is tax-free u/s 80L
5 years. 5-Year Post Can be Min: Rs. 10 per Office 7.5% renewed month or multiples Recurring compounded for of Rs. 5 Max: No Deposit quarterly another 5 limit Account years 6.25% 6.50% 7.25% 1 year 2 years 3 years
Post Office Time Deposit Account
7.50%
5 years
Post Office Monthly Income Account
8% p.a.
6 years
One withdrawal up to 50% of the balance is allowed after one year. Full maturity value No tax rebate allowed on R.D. 6 & 12 months advance deposits earn rebate. Long-term accounts could be closed after 1 year for discounted Investment interest. Accounts qualifies for Min: Rs. 200 and its could be closed after 6 deduction u/s multiple thereof months but before a 80C. Interest Max: No limit year for no interest. is tax-free u/s Interest is calculated 80L quarterly but payable yearly. Account if closed after 1 year but before 3 Min: Rs. 1500 per years will suffer a month or multiples deduction of 2% of the of it.Max: Rs. 4.5 deposit. Account if Interest is lakhs for individual closed after 3 years will tax-free u/s account and Rs. 9 suffer a deduction of 80L lakhs for joint 1% of the deposit. On account maturity, bonus of 5% on principal amount is admissible
Withdrawal can be Min: Rs. 500 in 1 made every year after 15-year year Max: Rs. 70000the 7th financial year. 8% p.a. Public 15 years in 1 year Deposits From the 3rd financial compounded Provident tenure can be made in year, loan can be yearly Fund Account lump-sum or 12 availed against PPF. installments No attachment under court decree order.
Investment qualifies for deduction u/s 80C. Interest is tax-free u/s 80L
8.4% compounded yearly. Kisan Vikas Money --Patra doubles in 8 years and 7 months
No limits. Investment denominations available are of Rs. 100, Rs. 500, Rs. 1000, Rs. 5000, Rs. 10,000, in all Post Offices and Rs. 50,000 in all Head Post Offices.
A single holder certificate can be purchased by an adult. No tax A certificate can also benefits be purchased jointly by two adults.
National Savings Certificate (VIII issue)
8% p.a. compounded half-yearly 6 years but payable after maturity
Min: Rs. 100. Also available in denominations of A single holder Rs. 100/-, 500/-, certificate can be 1000/-, 5000 & Rs. purchased by an adult. 10,000/-. Max: no limit
Investment as well as the interest deemed to be reinvested qualifies for deduction u/s 80C.
Senior Citizens? Savings Scheme
9% p.a.
5 years
Age should be above 60 years or 55 years above if retired under superannuation. Account if closed after Only 1 deposit Investment 1 year will suffer a allowed in multiple qualifies for deduction of 1.5% of Rs. 1000. Max is deduction u/s interest and after 2 Rs. 15 lakhs 80C. years will suffer a deduction of 1% interest. TDS is made on interest if it exceeds Rs. 10000 p.a.
The silent features of the current schemes are given below: • • • National Savings Certificates (NSC) National Savings Schemes (NSS) Post Office Time Deposite
• • • •
Post Office Recurring Deposit Account (RDA) Post Office Monthly Income Scheme Senior Citizen Scheme Kisan Vikas Patra (KVP)
•
Company Fixed Deposits.
It’s not just the banks that offer a fixed deposit these days. Even Non-Banking Financial Companies (NBFC) offer fixed deposits. Company fixed deposit (CFD) is a deposit with financial institutes and NBFCs for a fixed rate of return over a fixed period of time. The rate of interest is determined by the tenure of the deposit as well as other factors. The deposit made in a CFD is governed by section 58A of the Companies Act. CFDs are a good option for investment as they provide higher rate of interest compared to bank deposits. They are a good source of regular income by means of monthly, quarterly, half-yearly, or yearly interest incomes. However, these deposits are not secured like those in the bank. In case of default by a company, the investor cannot sell the deposit documents to recover his amount. The investor has no claim over the assets of the company in case the company is wound-up. This makes CFD a risky option. In order to protect ones investment from the risk, the performance of the company must be reviewed before investing. Also at the time of maturity, if you wish to reinvest your amount, check the company’s performance. Keep a regular check on the companies in which you plan to invest by keeping track of its balance sheet and share prices. This shall enable you to decide your investment in CFD. The NBFCs that offer CFD has to get themselves rated by the rating agencies such as CRISIL, CARE, ICRA etc., but manufacturing firms have no such compulsion. Before you invest in any of the CFDs, check the company’s ratings. A company with the rating of AA is considered a good investment option. Also, checking the previous records of the company in terms of timely interest payments will help in determining which company to invest in. Interest and Returns The interest rates offered in company fixed deposits are higher than that offered by banks. The rate of interest can be in the range of 9-16%. However, higher the interest rate, more risk is associated with it.
Thus, a company offering 15% interest rate would be more risky than that offering 11%. Before investing, ensure that you choose companies that have high ratings. Benefits of Company Fixed Deposits • • • • • • • • • • High rates of interest. Stable source of income. Sufficient safety as most companies are rated. Flexible tenure ranging from 6 months to 7 years. Only 6 months lock-in period High liquidity - issuers offer loan against CFD and pre-mature withdrawal facility No TDS in case the interest is only Rs. 5000 in a year. Nomination facility. Regular interest incomes - monthly, quarterly, half-yearly, or yearly. Simple operational process - PAN not required
Methods for Good Investment If you wish to have higher returns, you must take a little risk. And if you wish to avoid the risk, you must compromise on the returns. However, when deciding for your option for CFDs, it is important to know how to choose a right fixed deposit and how to ignore the wrong ones. Here are a few tips to ensure higher returns with low risk. Spread your risk - Spread your CFDs over a number of companies in different fields. Do not put more than 10% of your investment in 1 company. This will have 2 benefits. First, your risk will be diversified among various industries. Second, the interest from 1 company will not exceed Rs. 5000, and hence there will be no TDS. Right tenure of Deposit - Ideally you must invest for a period of 1-3 years. Blocking your investment for more than 3 years in a CFD could be risky, because the performance of the company cannot be assured for that long period of time. Periodic Review - Periodic review of the company must be done from time to time and at the maturity of the deposit. This will help you to decide whether you should renew or reshuffle the deposit.
•
Bank Deposits.
People generally want high returns on their investment. However they are not ready to take up the risks attached with the returns. In cases of mutual funds and share market, the returns are quite high but the risk associated with it is also very high. Not every person is ready to take such risks. For such people, there are some safe ways of investment. Depositing with banks is one way to have reasonable returns on your investment without a very high risk. The risks with bank deposits are minimal and thus it is ideal for investment and is preferred by a large number of people in India. The banks provide with various deposit schemes to meet different needs of the people. The most popular and common bank deposit accounts are: • • • • Current Deposit Account Savings Bank Account Recurring Deposit Account Fixed/Term Deposit Account
Current Deposit Account: Though this account is not a saving account, yet it is very useful for business people. This account is for businessmen, companies and other institutions that have to make payments through their bank account. Such people have high number of transaction per day and need to make many payments. Savings account does not have such flexibility and thus, is not suitable for business purposes. This makes current account very feasible for business purposes. This type of account provides for unlimited number of transactions and the amount of transaction per day. This type of account would require a certain minimal deposit at the time of opening of the account; the minimal deposits vary from bank to bank. Also, no interest is paid on the deposit made in current account. However, one major benefit is that bank allows you to withdraw more money than in your account. This is called overdraft facility. This facility is available to certain clients up to certain limit of amount. Savings Bank Account: The most commonly adopted form of saving for an average man is a banks savings deposit. It is ideal for people with limited income who wants to save money for future. The account could be opened as individual or joint account. The bank gives interest on the deposits in savings account. The rates of
interest are not very high and vary from bank to bank and from time to time. One can open a savings account with a minimum deposit, generally Rs. 100 to Rs. 500. Initial deposit varies from bank to bank. Money can be deposited at anytime in this account. However, there are restrictions relating the number of withdrawals per day. Generally a person can withdraw money using a withdrawal slip, or by issuing a cheque or through an ATM card. A minimum balance needs to be maintained in this account as prescribed by that bank. Recurring Deposit Account: For people who can save regularly, say every month and who wants to earn a higher interest than savings account shall go for a recurring deposit account. Under this account, a person needs to deposit a fix amount every month for a particular period of time. For example, if a person deposits Rs. 2000 every month for a period of 3 years, the entire amount along with the interest is payable at maturity, i.e. after 3 years. In case the person wants to close the account before maturity, he can do so. The amount and interest till that period shall be payable. This type of account could be opened by an individual person, or jointly with another. The guardian of a minor can open such account in the name of the minor. The interest received in this account is higher than savings account but less than fixed deposit account for the same time period.
Fixed Deposit Account: This deposit is also known as term deposit account. When a person has a good amount to invest but does not wish to go for risky investments, he must choose fixed deposits with banks. Fixed deposits are best for long-term safe investments. Under this deposit, a person saves a certain sum of money for a fixed period of time to earn higher interest on such amount. Interest is calculated on a monthly, quarterly or yearly basis depending upon the scheme of that bank. The deposit is made for a fixed time period ranging from a minimum of 15 days to many years. No withdrawal is allowed during the tenure of the deposit. However, the person could encash the amount before maturity. In such case, the bank charges a penalty and gives lower interest than initially agreed. The interest received on fixed deposit could be withdrawn at certain intervals. At the time of maturity, the depositor can withdraw the amount or renew the account for another time period. Loans could also be availed against the security of fixed deposit. To attract more customers, various schemes with fixed deposit account are offered by banks. Some such schemes are fixed deposit with life insurance, health insurance, instant loan facility, free credit cards etc. • • Saving Bank Account. Bank Recurring Deposit.
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Bank Fixed Deposits
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Bonds And Debentures In India.
A Bond is a loan given by the buyer to the issuer of the instrument. Bonds can be issued by companies, financial institutions, or even the government. Over and above the scheduled interest payments as and when applicable, the holder of a bond is entitled to receive the par value of the instrument at the specified maturity date. Bonds can be broadly classified into a. Tax-Saving Bonds b. Regular Income Bonds Tax-Saving Bonds offer tax exemption up to a specified amount of investment. Examples are: a. ICICI Infrastructure Bonds under Section 88 of the Income Tax Act, 1961 b. NABARD/ NHAI/REC Bonds under Section 54EC of the Income Tax Act, 1961 c. RBI Tax Relief Bonds
Regular-Income Bonds, as the name suggests, are meant to provide a stable source of income at regular, pre-determined intervals. Examples are: a. Double Your Money Bond b. Step-Up Interest Bond c. Retirement Bond
d. Encash Bond e. Education Bonds f. Money Multiplier Bonds/Deep Discount Bond
Similar instruments issued by companies are called debentures. Features: • Bonds are usually not suitable for an increase in your investment. However, in the rare situation where an investor buys bonds at a lower price just before a decline in interest rates, the resultant drop in rates leads to an increase in the price of the bond, thereby facilitating an increase in your investment. This is called capital appreciation. Bonds are suitable for regular income purposes. Depending on the type of bond, an investor may receive interest semi-annually or even monthly, as is the case with monthly-income bonds. Depending on one's capacity to bear risk, one can opt for bonds issued by top-ranking corporates, or that of companies with lower credit ratings. Usually, bonds of top-rated corporates provide lower yield as compared to those issued by companies that are lower in the ratings.
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In times of falling inflation, the real rate of return remains high, but bonds do not offer any protection if prices are rising. This is because they offer a pre-determined rate of interest. One can borrow against bonds by pledging the same with a bank. However, borrowings depend on the credit rating of the instrument. For instance, it is easier to borrow against government bonds than against bonds issued by a company with a low credit rating. There are specific tax saving bonds in the market that offer various concessions and tax-breaks. Tax-free bonds offer tax relief under Section 88 of the Income Tax Act, 1961. Interest income from bonds, upto a limit of Rs 9,000, is exempt under section 80L of the Income tax Act, plus Rs 3,000 exclusively for interest from government securities. However, if you sell bonds in the secondary market, any capital appreciation is subject to the Capital Gains Tax. bonds are rated by specialised credit rating agencies. Credit rating agencies include CARE, CRISIL, ICRA and Fitch. An AAA rating indicates highest level of safety while D or FD indicates the least. The yield on a bond varies inversely with its credit (safety) rating. As mentioned earlier, the safer the instrument, the lower is the rate of interest offered.
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Assurance In Bonds: This depends on the nature of the bonds that have been purchased by the investor. Bonds may be secured or unsecured. Firstly, always check up the credit rating of the issuing company. Not only does this give you a working knowledge of the company's financial health, it also gives you an idea about the risk considerations of the instrument itself. This knowledge makes for a better understanding of the available choices, and helps you take informed decisions. In secured instruments, you have a right to the assets of the firm in case of default in payment. The principal depends on the company's credit rating and the financial strength. Selling in the secondary market has its own pitfalls. First, there is the liquidity problem which means that it is a tough job to find a buyer. Second even if you find a buyer, the prices may be at a steep discount to its intrinsic value. Third, you are subject to market forces and, hence, market risk. If interest rates are running high, bond prices will be down and you may well end up incurring losses. On the other hand, Debentures are always secured. Interest payments depend on the health and credit rating of the issuer. Therefore, it is crucial to check the credit rating and financial health of the issuer before loosening up your purse strings. If you do invest in bonds issued by the top-rated corporates, rest assured that you will receive your payments on time.
Risks In Bonds: In certain cases, the issuer has a call option mentioned in the prospectus. This means that after a certain period, the issuer has the option of redeeming the bonds before their maturity. In that case, while you will receive your principal and the interest accrued till that date, you might lose out on the interest that would have accrued on your sum in the future had the bond not been redeemed. Inflation and interest rate fluctuation affect buy, hold, and sell decisions in case of Bonds. Always remember that if interest rates go up, bond prices go down and vice-versa.
Buying, Selling, And Holding Of Bonds: Investors can subscribe to primary issues of Corporates and Financial Institutions (FIs). It is common practice for FIs and corporates to raise funds for asset financing or capital expenditure through primary bond issues. Some bonds are also available in the secondary market. The minimum investment for bonds can either be Rs 5,000 or Rs 10,000. However, this amount varies from issue to issue. There is no prescribed upper limit to your investment-you can invest as little or as much as you desire, depending upon your risk perception. Bonds offer a fixed rate of interest. The duration of a bond issue usually varies between 5 and 7 years. Liquidity Of A Bond: Selling in the debt market is an obvious option. Some issues also offer what is known as 'Put and Call option.' Under the Put option, the investor has the option to approach the issuing entity after a specified period (say, three years), and sell back the bond to the issuer. In the Call option, the company has the right to recall its debt obligation after a particular time frame. For instance, a company issues a bond at an interest rate of 12 per cent. After 2 years, it finds it can raise the same amount at 10 per cent. The company can now exercise the Call option and recall its debt obligation provided it has declared so in the offer document. Similarly, an investor can exercise his Put option if interest rates have moved up and there are better options available in the market. Market Value Of A Bond: Market value of a bond depends on a host of factors such as its yield at maturity, prevailing interest rates, and rating of the issuing entity. Price of a bond will fall if interest rates rise and vice-versa. A change in the credit rating of the issuer can lead to a change in the market price. Mode Of Holding Bonds: Bonds are most commonly held in form of physical certificates. Of late, some bond issues provide the option of holding the instrument in demat form; interest payment may also be automatically credited to your bank account.
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Equity Linked Savings Scheme.
Equity linked Savings schemes are equity funds floated by mutual funds. They offer a 20 per cent tax rebate on investments upto Rs 10,000 in a given financial year. There is a three year lock-in on investments and there is no assurance on returns. The ELSS funds have to invest more than 80 per cent of their money in equity and related instruments. Returns form ELSS funds tend to fluctuate widely, in line with the performance of the stock markets. Young people should definitely invest in the ELSS funds as
they have the ability to take on higher risk. Ideally one should invest in them when the markets are down. These funds are now open all the year round. Therefore, investors can time their investment. The other way of investing in these funds could be a systematic investment, which essentially means investing a small sum regularly (monthly or quarterly). Features: • • • • • • Individuals, Hindu Undivided Families (HUFs) and companies. The units can be easily transferred by filling out a transfer form. A maximum investment of Rs 10,000 to claim an income tax rebate of 20 per cent. Nomination facility is available with ELSS. Open-ended mutual funds have no maturity period. However, to claim tax rebate under Section 88, the minimum lock-in period is three years. In the case of open-ended schemes, the units can be sold anytime after the initial lock-in period of three years. In the case of closed-end schemes, the units can be sold only on the due date specified.
Tax benefits: Dividends from mutual funds are fully exempt from income tax under Section 10(33). Equity funds (schemes that invest 50 per cent of their funds in equity) are also exempt from dividend tax. ELSSs offer under section 88 tax rebate on investments up to Rs 10,000 in a financial year. The difference between the selling price and the cost price is taxable as capital gains in the year of sale, at 10 per cent or 20 per cent, depending on whether or not you claim indexation benefits. Pluses • • • • • Possibility of high returns Lock-in period of only three years Easy transfer Low tax incidence (10 per cent) on redemption Efficient service, especially in the case of private mutual funds
Minuses • • High risk Difficult to choose the right fund (But not if you use the services of the Matchmaker!)
How to start? It’s a pity that you can only invest up to Rs 10,000 to claim the maximum tax rebate under Section 88. However, stay away from ELSSs if you cannot stomach the risk. You can also consider withdrawing from the PPF scheme and investing your money in tax-saving mutual fund schemes. Of course, you cannot reinvest the money that you withdraw. But you can channel this money towards other financial obligations and invest in ELSSs using your taxable income for the year
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