High returns and High Safety
“9.75% interest rates ” screamed the hoarding outside a prominent bank near the stock exchange . Bank interest rates are now looking attractive and it may be a good time to lock in debt allocations at high rates of interest . However before locking in your hard earned money in 'safe' bank Fds you must consider some facts. Taxes - Bank interest in fully taxable in your hands . Depending on the highest income bracket in which you fall , you may pay upto 30 % taxes on interest income . Effectively this means that a person falling in the 30% tax bracket will earn only 6.8% (9.75% less 30% taxes ) returns after paying taxes Inflation adjusted returns – Let me explain this with a simple example .Say you are able to buy your days requirement of vegetables for Rs.20 today . Assume prices of vegetable go up next year by 10 % while you have invested Rs.20 in a FD earning 8% . We also assume that you fall in the lowest tax bracket of 10 %. In a years time your Rs.20 would