The finance minister’s budget proposal of giving tax exemption to upto Rs 10,000 of interest income from savings bank accounts may shift depositors’ money from short term fixed deposits (FDs) to savings bank (SB) accounts.
Bank FDs with one-year maturity offer 9-9.25% returns at present. For a person in the 30% income tax slab, after paying tax the returns are to the tune of about 6.5%.
“The post-tax earnings on savings account comes very close to the term deposit returns on a post-tax basis,” said KVS Manian, president-consumer banking, Kotak Mahindra Bank. “This makes it profitable for customers to leave that much money in their SB accounts.”
Depositors in the 20% tax slab will get post-tax returns to the tune of 7.5%, and those in the 10% will get post tax returns of 8.4% from FDs offering 9.25% interest. “Depositors in the highest tax slab will benefit most from exemption of interest income from saving deposits,” said Vishal Dhawan, founder, Plan Ahead Wealth Advisors.
However, experts advocate against maintaining large balances in SB accounts to try and maximise returns. “Depositor should keep only that much amount in their savings bank account which is sufficient to cover monthly expenses,” Dhawan.