Month: February 2021

5-year Tax Saving FD

For risk-averse investors, bank fixed deposits are the most common investment alternative. Tax saving FDs of banks comes with a lock-in period of 5 years. Currently, on 5-year tax-saving FDs, SBI is giving an interest rate of 5.4 per cent to non-senior citizens and 6.2 per cent to senior citizens. According to Section 80TTB, senior citizens can claim a deduction of Rs 50,000 on the interest received from deposits. On tax-saving FDs investment and maturity amount are tax-free, but interest is taxable. That being said, only if the fixed deposit returns surpass Rs 40,000 (Rs 50,000 for senior citizens) in a year, TDS is deducted by the bank. TDS on your fixed deposit income withheld by the bank is 10 per cent if you support the bank with your PAN specifics. To know more about tax saving FDs, click here.

National Savings Certificate (NSC)

In order to diversify their fixed-income holdings, NSCs are very common among risk-averse investors. For a term of five years, it provides guaranteed interest. NSC is currently offering 6.8 per cent interest which is paid at maturity but compounded annually. However, interest earned from 5-year NSC is taxable at the time of maturity. It is worthwhile to know that, under Section 80C, the interest amount that is reinvested counts for a tax deduction, making it tax-free. One can make a deposit in this small saving scheme by a minimum of Rs. 1000/- and in multiples of Rs. 100/- with no upper limit.

Senior Citizen Savings Scheme (SCSS)

SCSS is another post office small savings scheme for individuals over 60 years of age. Currently, SCSS is providing a guaranteed return of 7.4% (payable quarterly) which is much higher than senior citizen special FD schemes of banks. This scheme comes with a tenure of five years and, within one year of maturity the SCSS account can be further extended to a block of 3 years. One can deposit in the account in multiples of Rs 1000/- up to a limit of Rs 15 lakhs. Interest received on SCSS is taxable if in a financial year it reaches Rs 50,000 and TDS is calculated accordingly as well. In the event of any surplus deposit made to the SCSS account, the excess balance will be automatically reimbursed to the account holder and only the interest rate of the PO Savings Account will be available from the date of the surplus deposit to the refund date. Under section 80C of the Income Tax Act, 1961 deposits made towards SCSS qualify for tax deductions.

Sukanya Samriddhi Yojana (SSY)

In the name of a girl child, a parent or guardian can open the SSY account before she reaches 10 years of age. Under this government-backed scheme up to 15 years from the date of account opening, one can make deposits. After 21 years or at the time of the girl’s marriage, the SSY account matures after she turns 18. If the girl hits the age of 18 or after completing Class 10, an individual is allowed to withdraw up to 50 per cent of the deposit. For a limit of two daughters, the account can be opened with a total contribution of up to Rs 1.5 lakh per year. With effect from 01-04-2020 SSY is providing an interest rate of 7.6% per annum which is calculated on a yearly basis. Investments under SSY, as PPF, come under EEE status, which means that at the time of deposit, accrual of interest and withdrawal, an investor receives a tax deduction.

Public Provident Fund (PPF)

PPF is among the best investments in the fixed income space as it is backed by the government and provides no market-linked returns. That being said, the downside of this scheme is that it comes with a long maturity period of 15 years. If you do not need the interest income at the time of maturity, the maturity can be extended further by a block of 5 years. In some conditions, the PPF allows early withdrawals within five years of account opening. PPF currently proposes an interest rate of 7.1% p.a, compounded annually. Under PPF deposits can be made in lump-sum or in ​installments with a minimum contribution of Rs 500 up to a limit of Rs 1.5 lakh per annum. An account holder can make one withdrawal after five years, except the year of account opening, within a financial year. At the end of the 4th preceding year or at the end of the preceding year, withdrawal can be made up to 50% of the account balance whichever is lower. PPF comes under the tax status of EEE, which implies that at the time of deposit, accrual of interest and withdrawal, an account holder can claim a tax deduction.

Maintaining Minimum Balance

The majority of bank accounts require you to maintain a monthly average balance (MAB) of Rs 500 to Rs 2 lakh per month. When salary is not credited for three consecutive months, your account is converted to standard savings accounts, forcing you to maintain the average monthly balance. If you have multiple accounts, you need to maintain a minimum balance in all the accounts.

Extra Charges

Also, when you don’t maintain the required balance, the bank will deduct the charges depending on the account. The Bank will also deduct the debit card maintenance fees on a yearly basis if it is linked to your account. Consider if you have 3 idle accounts, and you maintain average balance and pay for yearly debit card fees, calculate how much you are paying even when you are not using the account.

If you wish to maintain multiple accounts make sure your debit card is not linked, and you have not availed of any other extra services which keep mounting every year.

maintain keep in a certain state, position, or activity; e.g., “keep clean” More (Definitions, Synonyms, Translation)

Inoperative/ Dormant account

As per the Reserve Bank of India (RBI) directive, if there are no ‘customer-induced transactions’ for more than 24 months, a bank account is automatically listed as inoperative or dormant.

If there are no transactions in the account for a period of two years, all savings and current accounts will be considered inoperative or inactive. Such accounts will be separated and held in separate ledgers.

To reactivate your inactive account, you will have to submit a written application. Alongside your reactivation application, you will have to submit fresh KYC documents.

Interest Rates

The main disadvantage here is you will receive only 4% interest for the amount held in a savings account. Whereas if the same amount is held as a fixed deposit, it will fetch a higher return. If you have multiple bank accounts you need to maintain an average monthly balance in all the accounts except your salary account. The minimum balance maintained will get you a return of 4% only.

Tax Burden

Dormant accounts are more prone to fraud as there will be less activity by the customer. There is no point in making the compilation of details and statements from so many banks making it difficult and overburdening when filing tax returns.

Conclusion

It is best to close idle accounts if you are not using them due to the above-mentioned reason. If you still want to continue you should be really careful to keep track of all the accounts.

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