RBI has cut the REPO rate by 5 times i.e. there has been reduction of total 15 basis points. Because of this, majority of banks such as SBI, ICICI, HDFC etc. slashed their FD rate.
This fall has been financially stressful for many people, especially retired category of people, who depend on bank fixed deposit for regular income. As a result of fall, these people now have to renew their FD at lower rate.
In this article, we will discuss other investment options to look at along with their tax impact.
1) Small finance bank FD
Small finance bank e.g. Utkarsh bank and Jana small finance offer higher rate of 8.5% to 9% on one year deposit whereas SBI offer 6.25% for one year deposit. These small finance banks are covered under Deposit Insurance and Credit Guarantee Corporation of India and it is regulated by RBI.
Interest on FD taxable as per slab rate.
2) Post Office scheme
Post office offers 9 long term scheme, interest on which revised quarterly. These schemes includes PPF, post office time deposit, senior citizen saving scheme, monthly income scheme out of which PPF is the most convenient option as the investment and the amount at maturity including interest is exempt from tax and gives a return of 7.9% p.a.
Investment in NSC also gets deduction u/s 80C. The accrued interest also gets the section 80C benefit as it is reinvested in the scheme every year and consider as fresh investment. NSC gives returns of 7.9%p.a. and only final year interest is taxable as it is payable to investor.
3) Tax free bonds
These bonds are issued by the government, usually for 10 to 20 years. These are lower risk bonds, of which interest income is also exempt from tax.
The only drawback that it has a lock-in-period and if you want to invest, look out for issues as they may not be always open.
4) Mutual fund
For better investment options, we include debt mutual funds and arbitrage mutual fund.
Debt mutual funds provide indexation benefit. It gives lower return compared to equity mutual fund but it’s a lower risk fund, so, safer option for conservative investors.
Arbitrage funds are for those investors who want profit from volatile market without too much risk. Although it’s a lower risk fund but the payoff is unpredictable due to volatility. These funds have higher expense ratio and they taxed like equity mutual funds.