Bank Deposits are the most popular investment avenue for investors, especially the conservative ones. However, the attractiveness of these deposits is linked to the rate of interest offered by the Banks and the applicable tax rate on the interest earned. In this article, I would like to examine the likely impact the recent Budget announcements could have on Bank Deposits.
Typically, the interest rate you earn from the Bank is linked to the tenor, size, resident status and your age. Generally Banks offer higher rates to Senior Citizens and on longer term deposits (the latter may not be true at all times). You could be offered a different rate if you are investing above a certain threshold (Rs 2 Crores or more). The interest rates offered to Non-Resident Indians investing through their NRE accounts differ from what is offered to Resident Indians.
Interest rates are falling!
10 year G-Sec Rates during the last 5 years
The yield on a 10 year Government Security (G-Sec) is generally used to benchmark interest rates. The 10 year G-Sec rates have dropped rapidly over the last few months from 8.20% in October 2018 to 6.70% on the Budget day.
Most investors tend to invest for a period of 3 years or more. State Bank of India has dropped the interest rates from 6.85% to 6.60% for deposits over 5 years since May 9, 2019. For Senior Citizens, the interest has come down from 7.35% to 7.10%. In both cases the interest rates have dropped by 0.25%.
The Bank interest rates can fall further as they have not corrected in sync with the drop witnessed in the 10 year G-Secs. We can expect a further correction soon.
Budget proposes taxing the super rich.
The recently announced Budget proposals increases the surcharge on income tax for individuals earning more than Rs 2 Crores. As you would notice from the table below, the marginal tax rate for individuals earning over ₹5 Cr is now over 42% (which was 35.88% earlier).
Consumer Price Inflation has risen sharply!
If you are in the highest tax bracket, the post tax return on a Bank Fixed Deposit that earns 6.60% will now be a meagre 3.78%.
If deposit rates were to drop another 1% from hereon, the post-tax return could drop to below 3%! At this rate, the returns from Fixed Deposits fall even below the inflation rate. You certainly need investment options that can do better than the Bank!
