Bank On Higher Returns

Investment options that are better than fixed deposits.

- Anil Rego

Returns are a byproduct of investment decisions. Before considering the returns on any investment,it is prudent to analyse how and why some products provide higher or lower returns. It is also wise to consider the comfort, or the quality of sleep, we get after making investments. If the investment has features that are likely to cause nightmares or severe mood swings, then, it is certainly in the high-risk category. Fixed deposits (FDs) in banks are not entirely exempt from this segment. Some FDs, especially those in some small, private or cooperative banks, may offer higher interest rates than others, but these banks carry higher risk of defaults.

Besides risk, the factor that has very high impact on returns, but is easier to analyse and quantify, is taxes. Taxation of returns can turn an otherwise attractive investment into one that provides sub-optimal returns. The impact of tax on returns can be front ended—the investment made may provide a deduction from taxable income under Section 80C of the Income Tax Act. 80C deductions are available to investors on a range of investments, including a category of FDs that are locked in for five years. The other kind of tax impact is back ended—on the returns earned on the investment.

The interest earned on fixed deposits (other than tax saving fixed deposits) is exempted to the extent of ₹10,000 and any interest earned over and above that will be added to the taxable income. Public Provident Fund (PPF) and most life insurance policies offer tax benefits both through deduction from taxable income during investment and by providing tax-free returns.