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Interest rates on PPF and other savings schemes revised from 1st April

On 1st December 2011, Government had aligned interest rates on small savings schemes such as PPF, NSC, etc with rates of Government securities.  Further the rates were to be reset in April month every year based on market rates prevailing at that point of time.


On 26th March, Government has announced rates on such schemes which shall be applicable from 1st April 2012 till 31st March 2013.  Rates for all the schemes, except for savings deposits, have been increased between 20 basis points to 50 basis points.  100 basis points is one percentage.


The table below compares the existing rate of interest with the new rates.

Scheme	Existing interest rate	Interest rate w.e.f 1st April 2012
Savings Deposits	4.0	4.0
1 Year Time Deposit	7.7	8.2
2 Year Time Deposit	7.8	8.3
3 Year Time Deposit	8.0	8.4
5 Year Time Deposit	8.3	8.5
5 Year Recurring Deposit	8.0	8.4
5 Year SCSS*	9.0	9.3
5 Year MIS	8.2	8.5
5 Year NSC	8.4	8.6
10 Year NSC	8.7	8.9
PPF	8.6	8.8

*SCSS is Senior citizen savings schemes.  


For more details about these schemes and changes made therein last year, click on this link.

How much of your bank account deposits are secured?

The money in your bank account is covered under the deposit insurance scheme up to Rs. 1,00,000.  i.e. if the bank is wound up or liquidated (closed), money kept with the bank to the extent of Rs. 1,00,000 is secured and shall be paid back to the account holder under the deposit insurance scheme.

However, the above limit can be increased to one’s benefit if right set of accounts are open with the bank.  For a family of husband, wife and a child, there is a possibility to cover up to Rs. 7,00,000 under the deposit insurance scheme.  Hence it is necessary to understand this scheme to know which types of accounts are covered and how the limit of Rs. 1,00,000 is determined.

Which banks are covered under the scheme?

There is a belief that this benefit is available only if one has money in public sector banks.  However, it is not so.  All commercial banks including private sector banks and branches of foreign banks functioning in India are covered under the scheme.  Further all co-operative banks other than those from the states of Meghalaya, Mizoram, Nagaland and Union Territories of Chandigarh, Lakshwadeep and Dadra & Nagar Haveli are covered.

How is the limit of Rs. 1,00,000 is determined?

Deposits of each depositor in a bank is insured up to maximum of Rs. 1,00,000 for both principal and interest amount held by him in the same right and same capacity.

Let us analyse the implication of the underlined words in the above statement.

Deposits include savings, fixed, current and recurring deposits.  Thus all types of deposits which we generally keep with the bank are covered under the scheme.

Deposits of each depositor in a bank means the limit is bank specific.  Thus if you have accounts in two different banks, then both are covered to the extent of Rs. 1,00,000 separately.  However, remember that it shall not help if you spread your amount in different branches of the same bank.  The limit specified is per bank and not per branch.

Rs. 1,00,000 limit covers both the principal and interest amount.  For example, if you had a fixed deposit of Rs. 95,000 on which interest of Rs. 8000 has been accrued over a period of time, your deposit in the bank totals to Rs. 1,03,000 and it shall be covered to the extent of Rs. 1,00,000.

Same right and same capacity

Deposits which are held in the same right and same capacity are aggregated to calculate Rs. 1,00,000 limit.  What does one mean by ‘same right and same capacity’?

If you have a savings account and a fixed deposit account in your name, both the accounts are considered in the same right and same capacity and the insurance coverage under the scheme shall be limited to Rs. 1,00,000.

Now suppose, you have a joint account along with say your spouse.  This account is considered in a different right and different capacity and the insurance coverage is provided separately.  Thus in this case the total coverage shall be Rs. 2,00,000 (Rs. 1,00,000 for the amount in savings and fixed deposit account and Rs. 1,00,000 for the amount in joint account).

Next obvious question which arises is whether the order of names appearing in joint account affects the insurance cover?  The answer is no and all the joint accounts with same names (though in different order) are clubbed and the limit of Rs. 1,00,000 apply to them. 

Examples given by RBI to understand the concept of same right and same capacity

Coverage of deposits held in joint account

Account (i)	1st holder: Shri A. K. Sharma 2nd holder: Smt. B. Sharma	Maximum insured amount up to Rs. 1,00,000
Account (ii)	1st holder: Shri A. K. Sharma 2nd holder: Shri P. Sharma	Maximum insured amount up to Rs. 1,00,000
Account (iii)	1st holder: Smt. B. Sharma 2nd holder: Shri A. K. Sharma	This Account will be clubbed with Account (i)
Account (iv)	1st holder: Shri A. K. Sharma 2nd holder: Smt. B. Sharma 3rd holder: Shri P. Sharma	Maximum insured amount up to Rs. 1,00,000
Account (v)	1st holder: Smt. B. Sharma 2nd holder: Shri P. Sharma 3rd holder: Shri A. K. Sharma	This Account will be clubbed with Account (iv)

Source: RBI

Accounts held in different capacities

Account Name	Savings	Current	FDs	Total Deposits	Deposits Insured
S K Pandit (Individual)	17,200	22,000	80,000	1,19,200	1,00,000
S K Pandit (Partner of ABC & Co.)		75,000	50,000	1,25,000	1,00,000
S K Pandit (Guardian for Master Ajit)	7,800		80,000	87,800	87,800
S K Pandit (Director, J K Udyog Ltd)		2,30,000	45,000	2,75,000	1,00,000

Source: RBI

From the above, it can be seen that by having combination of accounts one can increase the insurance coverage.  For a family of husband, wife and a child, one can have three individual accounts in each of their names.  Further one can have four joint accounts in the combination of husband, wife and child’s name.  Thus one can have seven accounts all in different rights and different capacities and insurance cover of Rs. 1,00,000 shall apply to each of them separately and total cover of Rs. 7,00,000 shall be available.  And remember all in one bank!! 

Elevated Interest Rates on Fixed Deposits to stay?

Policy actions of last fortnight were eagerly awaited because that would set the tone for the interest rates during the next financial year. 

With effect from 10^th March, RBI reduced Cash Reserve Ratio (CRR) by 75 basis points (one percentage is 100 basis points) from 5.5% to 4.75%.  CRR is the percentage of deposit that commercial banks must keep with RBI.  The CRR cut was expected as the entire banking system was experiencing liquidity tightness and it was expected to be worsen on account of advance tax payments before 15^th March.

In subsequent week, RBI maintained the interest rates during fourth mid quarter review on March 15. 

A day later, finance minister announced the budget for 2012-13 raising the indirect tax levy.  The budget is expected to be inflationary on account of the same. 

With fiscal deficit projected to be 5.1% of GDP in 2012-13, government’s huge borrowing programme for the next year and possibility of inflation to remain high, RBI has tough task ahead to maintain adequate liquidity in the system and inflation low simultaneously.

Effect of interest rates on fixed deposits

The above factors shall ensure that interest rates on loans as well as fixed deposits stay elevated for most part of the next year.

Currently, banks like Tamilnad Mercantile Bank and IDBI are offering interest rate of 10% and 9.5% per annum respectively on fixed deposits for tenure greater than 5 years.  Short term rates for period less than 1 year are also attractive.  

Since the time Bachhat started tracking interest rates on fixed deposits, the average interest rates of all banks for period less than 3 months has increased by 104 basis points and for period between 3 months to 6 months has increased by 82 basis points.  Even for period greater than 5 years, the increase is by 39 basis points.

Tenure	Average Interest Rates (%)		Difference (%)
	8th May 2011	20th March 2012
< 3 months	5.59	6.62	1.04
3 to < 6 months	6.78	7.60	0.82
6 to < 12 months	8.16	8.60	0.44
1 to < 2 years	9.25	9.47	0.22
2 to < 3 years	9.02	9.24	0.21
3 to < 5 years	8.80	9.16	0.36
5 years & above	8.67	9.06	0.39

This is a good time for someone who wants to lock-in to high interest rates on fixed deposits.

One can view the latest interest rates on fixed deposit offered by various banks here.

Revision of tax slabs and its impact on tax outgo

Quick analysis of revision of tax slabs and its impact on tax outgo.  Overall male tax payers less than 60 years of age benefits the most and there is now no differentiation between male and female tax payers.

Tax slab revision and its impact



Click here for full page link.

Impact of Budget 2012 on Individual Tax Payers

I have tried to calculate the tax implications of various announcements made in Budget 2012 for individual tax payers. The calculations are carried out for individuals with income slabs for Rs. 3 lakhs, Rs. 5 lakhs, Rs. 10 lakhs, Rs. 15 lakhs and Rs. 20 lakhs.

Budget 2012 and Individual Taxpayers


Click here for full screen link.

Modified version of the above table appeared in DNA Newspaper dated 17th March 2012.

“I MUST BE CRUEL ONLY TO BE KIND”

Impact of budget on an individual taxpayer 

Honourable Finance Minister quoted Shakespeare's immortal words “I must be cruel only to be kind” before beginning his speech on tax proposals.  However for an individual, the budget seems to be a mix of kind and cruel treatment.  Kind enough to tweak the tax slabs favorably and providing additional tax deduction avenues in the form of interest income from savings account deposit and preventive medical check-up and cruel enough to take the entire benefit by way of increase in service tax and excise duty rates. 

THE KIND TREATMENT

The largest benefit given to individual tax payers in the budget is the favourable revision of tax slabs.  The exemption limit has been increased from Rs. 1,80,000 to Rs. 2,00,000 for all individuals (males and females aged less than 60 years).   Taxable income more than Rs. 8,00,000 and less than Rs. 10,00,000 which currently is taxed at 30% shall be taxed at 20% after the budget announcement.  This is a clear benefit of Rs. 20,000 for individuals earning more than Rs. 8,00,000.  The revised tax slabs now are - 10% tax rate for taxable income greater than Rs. 2,00,000 to Rs. 5,00,000; 20% tax rate for taxable income greater than Rs. 5,00,000 to Rs. 10,000,000 and 30% tax rate for taxable income greater than Rs. 10,000,000.

The deductions available for individuals have also increased by making interest income from saving account deposits up to Rs. 10,000 eligible for deduction from taxable income.  In addition, the finance minister has introduced one more avenue for tax deduction – Rajiv Gandhi Equity Scheme (RGES).  Though the details of the scheme are not cleared, investment in equity up to Rs. 50,000 shall be eligible for 50% deduction for individuals earning less than Rs. 10 lakhs.  However, such investment shall have locked in of 3 years.

Further,  expenditure incurred for preventive medical check-up for self, spouse, dependent children or parents up to Rs. 5,000 shall be eligible to be included under overall deduction of Rs. 15,000 under Section 80D.

There are further smaller relief like reduction in the securities transaction tax on delivery based transactions of equity securities from 0.125% to 0.1% of the transaction value and increase in threshold from Rs. 2,500 to Rs. 5,000 for deducting tax on interest from debentures.  Further both listed and non-listed debentures get covered now under the above criteria.

Last year, budget incorporated a provision that the life insurance premium, in order to get benefit under Section 80C, should not be more than 20% of the actual capital sum assured.  Now the budget has proposed that the premium should not be more than 10% of the actual capital sum assured.  This is good for the customers, since this shall result in enhanced insurance coverage for the same amount of premium.  Further the budget also specifies in detail how the capital sum assured shall be calculated so that insurance company do not circumvent this provision by varying the sum assured from year to year. 

THE CRUEL TREATMENT

The cruelest shock in the budget for individuals is the increase in service tax rate from 10% to 12%.  There has also been hike in excise duty rates and this along with service tax rate increase almost negate the benefit of tax savings on account of slab revision.  This shall maintain the inflationary pressure on the prices and shall ensure that interest rates of loan remain high for substantial part of the year.

Further w.e.f October 2012, sale of residential property for transaction value more than Rs. 50 lakhs in specified urban agglomeration or Rs. 20 lakhs in any other area shall attract tax deduction at source of 1% of the transaction value irrespectively whether the transfer is profitable or not.  Individuals cannot evade this, since it has been made mandatory to provide proof of tax deduction while registering the transfer.

Cash purchase of bullion and jewellery for amount more than Rs. 2 lakhs shall lead to tax collection of 1% of the value by the seller.

In case, one has any asset located outside India (financial or otherwise), he has to compulsorily file return of income in India irrespective of whether he has taxable income or not. 

BEING SIXTY GETS MORE SWEETER

After reducing the senior citizen age limit from 65 years to 60 years last year, the fascination of Mr. Mukherjee for senior citizen continues and he has exempted them from paying advance tax in case they do not earn any income from business and profession.  Further the age limits in Section 80D (Health Insurance Premium) and Section 80DDB (treatment of specified ailment) and for no tax deduction certificate has been rationalized to 60 years from 65 years at present. 

Thus it can be seen that the budget is a mixed bag of kind and cruel treatment for an individual taxpayer. 

Modified version of the article to appear in DNA Newspaper dated 17th March 2012

Better to disregard the notification on tax return filing exemption

As expected, Central Board of Direct Taxes has issued a new notification last month to exempt salaried tax payers with income not exceeding Rs. 5,00,000 from filing income tax returns.  The notification stipulates various conditions (same as previous year’s) which are required to be satisfied to be eligible for the exemption.

One can read the conditions required to be satisfied in Bachhat previous year’s article here.  The article also list down the scenarios where the benefit shall not be available. 

Subsequent to Bachhat's article, CBDT also released FAQs on the last year’s notification.  Since the essence of current year’s notification remains the same, same FAQs can be applied to it.  Let us review few FAQs in this post to understand who shall stand benefited for the exemption.

Suppose Manish has a salary income of Rs. 6,20,000.  His interest income from savings bank account is Rs. 10,000 and as required by the notification, he has reported his interest income to the employer and tax has been deducted thereon.  Thus his Gross Total Income (as per tax parlance) is Rs. 6,30,000 for the year.  Now he is claiming deduction under Section 80C of Rs. 1,00,000 by investing in PPF, paying life insurance premium, etc.  Further he has invested Rs. 20,000 in tax saving infra bonds under Section 80CCF. He also claims deduction of Rs. 15,000 under Section 80D for health insurance premium paid on health policies.  In total, he has paid / invested Rs. 1,35,000 (Rs. 1,00,000 + Rs. 20,000 + Rs. 15,000) under various tax saving instruments.  Thus his Total Income (again as per tax parlance) is Rs. 4,95,000 (Rs.6,30,000 – Rs. 1,35,000) for the year.  Whether Manish is exempted from filing his tax return as per the notification?

Yes. One needs to consider the ‘total income’ of Rs. 4,95,000 and not the ‘gross total income’ of Rs. 6,20,000 to check whether he is qualified for exemption under the notification.  Thus in our example, Manish is qualified to take exemption and shall not be required to file income tax return for the year.

Let us add one more criteria to the above example.  Now suppose Manish has donated Rs.10,000 during the year and is eligible for the deduction under Section 80G. 

In this case, exemption available to Manish shall be withdrawn since as per the current guidelines, employers are not required to take cognizance of donations made while deducting TDS, unless the donation is to Prime Minister’s Relief Fund, Chief Minister’s Relief Fund or Lt. Governor’s Relief Fund.  Hence, Manish’s employer will not consider donation of Rs. 10,000 and shall deduct tax on the same and Manish shall be required to file return of income to claim refund of tax.

Similarly if one is claiming deduction of interest paid on housing loan, he is not qualified for the exemption even though after the deduction his ‘total income’ does not exceeds than Rs. 5,00,000.  The reason being the notification is applicable only if the individual has salary income and income from savings bank account.  Hence he shall be required to file the return even though the entire tax is deducted by the employer and no further tax is payable.

As Bachhat stated last year, it would have made more sense if the circular had exempted all tax payers with income not exceeding Rs. 5,00,000 provided all required taxes are paid (either by way of TDS, Advance Tax or Self-Assessment Tax) and PAN number has been quoted at the time of payment of these taxes.

Hopefully, better sense shall prevail during DTC and we shall see some amendment.  Till then, it is wise to disregard this notification.