The Savings bank account has had an extreme makeover of sorts during the last year. First, it was the deregulation of interest rates with the lower limit of 4% and, now, the announcement of tax-free interest to the extent of R10,000 in the Budget. Although this is an extremely positive move as far as the ubiquitous savings bank accounts are concerned, does it steal the thunder away from its counterpart — fixed deposits, which have hogged the limelight for a fairly long haul an investment avenue?
According to the Budget proposal, an individual/Hindu Undivided Family will get a deduction of R10,000 for the interest earned annually from savings accounts. Remember, this does not apply to fixed deposit interest rates; they are taxable as usual at normal rates.
A new Section 80 TTA is proposed to be inserted in the Income Tax Act to enable this deduction. This amendment comes into force from April, 2012, onwards and will be applicable for all subsequent financial years.
Investors are often advised to hold not more than three months of household budget in their savings bank; however, with the returns and the tax sops available, it could become one of the most sought-after investment avenues over time. Savings bank balances have started working harder for us; obviously, there is no complaining!
Banks’ reaction
With this announcement, there are numerous banks which have revised their savings bank rates. YES Bank raised interest rates on its savings bank deposits to 7% from the earlier 6%, for those customers having balance above R1 lakh (it will continue to offer 6% for balance below R1 lakh), making it the highest rate on savings rate deposit.
While HDFC Bank is offering 9% for R1 crore deposits over for a slab of 1-2 years on their fixed deposits and a slightly lower rate on their savings bank balance, Dhanlaxmi is providing 8% for 1-3 years for any amount on fixed deposits.
Lakshmi Vilas Bank also raised interest rates on NRE deposit to 10%. Clearly, the private banks are running up the altar in every which way to gain as much assets under management as possible in a quick time.
The PSU banks, however, are sitting pretty as they already have substantial funds under their wing.
Fixed deposits vs savings bank interest
A huge concern across the board is that it may take the sheen off fixed deposits, the banking product that has garnered most of the attention over decades as an investment avenue.
There could be a clear paradigm shift in individuals’ perception, given that savings bank account offers phenomenal liquidity, in addition to decent post-tax returns.
One can see in graph 2 that the difference has narrowed down; interest rates having peaked, going forward, the interest rate on fixed deposits may only moderate. The FD rates at this point are around 8.75-9% per annum and it could moderate and settle around 8-8.5% per annum over the second half of FY13, which could be yet another boost for savings bank accounts. Fixed deposits were already losing their battle against fixed maturity plans (FMPs) of mutual fund houses, now they have yet another investment avenue to fend off.
In the short term, the interest rates are expected to hover on the higher side, before they start their downward spiral, the loyalists could make their shift from fixed deposits during this period. Further, flexi-deposits which had caught the fancy of the investors could go completely out of fashion as interest rates start to correct.
Debt mutual funds vs savings bank balance
Debt mutual funds largely offered the liquidity facility and tax efficiency compared to fixed deposits. And with the recent amendment, this edge goes right out of the window as far as savings bank accounts are concerned.
Short-term mutual funds, such as liquid-plus funds, have been investing in T-bills, Call money, etc; they may now start investing in savings banks too, given that they offer similar liquidity and efficient returns.
Fixed maturity plans have often been compared to fixed deposits. If they are now compared to savings bank accounts, FMPs are likely come second best given the obvious liquidity advantage of savings bank accounts.
It will take time more before this amendment actually becomes the game changer on the debt instrument front. In either case, the investor is likely to have the last laugh!
The Indian Express
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