• Skip to main content
  • Skip to header right navigation
  • Skip to site footer
Site Logo

BasuNivesh

Personal Finance Blog

  • Home
  • Service
    • Fee-Only Financial Planning Service
    • Financial Wellness Session
  • Blog
  • Old Articles
  • About Us
  • Contact us
  • Media
  • Search

SBI Tax Saving Deposit-Why effective yield is so high?

February 11, 2013by Basavaraj Tonagatti

Look at below advertisement from SBI Bank. You may surprise to see effective returns from Tax Saving FDs are showing as 17.39% for senior citizens and 16.64% for others. How this much high return SBI can generate from it’s tax saving FDs? Let us see the marketing trick.

SBI Tax Saving Deposit

From above table you notice that the amount you are investing is Rs.10,000. Tax benefit you get immediately is Rs.3,090 (considered under Tax Bracket of 30%). So your actual investment is Rs.6,910. For this actual investment you will get return of Rs.15,605 (for senior citizens) and Rs.15,228 (for others). Rate of Interest they are quoting as 9.00% for seniors and 8.50% for others. Then how this effective annual yield is 17.39% and 16.46%?

You need to understand difference between interest on investment and effective yield. While quoting interest on investment usually taxation will not be considered. Whereas during quoting effective yield, taxation is also considered (which need to be at beginning and at end). But in above advertisement of SBI, they showed the tax benefit during the time of investment and completely neglected the post maturity tax issue.

What they showed is 50% correct, but they left the tax issue which you need to pay on the interest part of maturity. Showing tax benefit during the time of investment is wonderful idea but neglecting the taxation issue of post maturity is not worth. I will show in below table the actual tax benefit what you get from investment, what tax you need to pay on post maturity and how much is the actual yield.

SBI

From above table you notice that after considering the taxation both during investment as well as on maturity how the effective yield was reduced. I considered 30% tax bracket for both the periods.

One more point to be noted is, above effective yield will be higher if you are under 30% tax bracket. It will be get reduced if you are under lower tax bracket. So considering these effective rates without taking into what tax bracket you are into may actually again reduce your effective yield from this product.

Category: Tax PlanningTag: SBI Tax Saving Deposit

About Basavaraj Tonagatti

Basavaraj Tonagatti is the man behind this blog. He is SEBI Registered Investment Adviser who is practicing Fee-Only Financial Planning Process and also an Independent Certified Financial Planner (CFP), engaged in blogging since 7 years. BasuNivesh blog is ranked as one among India's Top 10 Personal Finance Blog. He is not associated with any Financial product/service provider. The purpose of this blog is to "Spread personal finance awareness and make them to take informed financial decisions." Please note that the views given in this Blog/Comments Section/Forum are clarifications meant for reference and guidance of the readers to explore further on the topics/queries raised and take informed decisions. These should not be construed as investment advice or legal opinion."

Previous Post: « How much you believe your advisers?
Next Post: Income Tax Sparsh-Register and Track status of PAN Card Complaints »

Reader Interactions

Comments

  1. Vinod

    May 17, 2015 at 12:17 PM

    Hi Basu,

    I invested a lump sum amount in SBI Magnum Tax Gain – Divident Reinvestment plan in 2007. Since its a reinvestment plan i am getting every year a divident amount and it get invested in the same fund. Issue is the divident amount is consider as a new investment and block for next 3 years. Please let me know how can i sell the complete amount of fund or switch in the same fund growth option.

    Thanks & Regards,
    Vinod Singh

    Reply
    • Basavaraj Tonagatti

      May 17, 2015 at 12:36 PM

      Vinod-Try to redeem the lock-free units. This is the only option. I don’t know what prompted your adviser to recommend you.

      Reply
      • Vinod

        May 17, 2015 at 5:20 PM

        Thanks basu. Few days back I read somewhere MF rule revised all the reinvestment options are automatically switch to payout option. I checked this year the dividend amount got in my account instead of repurchase the fund. So my fund is automatically switch to divident payout option.

        Please let me know can i switch it to payout to growth option now and what is the procedure.

        Thanks,
        Vinod

        Reply
        • Basavaraj Tonagatti

          May 18, 2015 at 6:06 PM

          Vinod-Yes, now the dividend reinvestment option ruled out. It is good if your fun option changed automatically. Your problem resolved automatically right?

          Reply
  2. Alap Shah

    January 5, 2014 at 10:21 AM

    Good Morning Sir

    Myself is Alap Shah.

    I am having query regarding Tax Saving Bank FD.

    I am investing 1,00,000/- Rs in Bank Saving FD of 5 Years for Saving under section 80(C) whose interest is Tax Free For me.

    Now simultaneously can I Invest 1,00,000/- Rs in PPF also , which i would not show as saving under section 80(c) while filing Return as i have already invested 1,00,000/- Rs in Bank FD.

    In that case the interest i would earn on Both Tax Saving Bank FD and PPF would be TAX Free?

    Kindly Guide.

    Regards
    Alap

    Reply
    • Basavaraj Tonagatti

      January 5, 2014 at 11:48 AM

      Alap-How the tax saving FDs interest is tax free for you? According to current taxing rules, whatever you earn from Bank FDs are taxable. So first rectify that. Even though your tax saving options under Sec80C exhausted, still you can invest Rs.1,00,000 per year in PPF. But as I said above, only PPF interest is tax free but not Bank FDs interest.

      Reply
  3. Jasbir singh Khalsa

    February 12, 2013 at 9:52 PM

    Thanx for calculations you showed… it is really useful understand different between nominal and effective rates… we can go for city union bank five year FD which is providing 9.5% rate as nominal interest….. which tax free upto 100,000 RS investment per year… look at this site … http://www.cityunionbank.com/english/deposit.aspx

    Reply
    • BasuNivesh

      February 12, 2013 at 10:05 PM

      Jasbir-Thanks commenting and sharing the link, which may be helpful for others.

      Reply
  4. Irshad

    February 12, 2013 at 12:46 PM

    Still better if EAY is 14-15 %. Only issue is lock-in period which is 5 years but safe whereras ELSS is 3 years & risky. In safe mode is it not bank FD is better than NSC (longer period, interest is less & taxable) or PPF (longer period)?

    Reply
    • BasuNivesh

      February 12, 2013 at 2:32 PM

      Irshad-Thanks for commenting. But which is best from Bank FDs, NSC and PPF is depends on his need. So we can’t say generically. If his waiting period is more than 10 years then PPF is the best tool else these short term investments are better. Hence we can’t say which is good or bad.

      Reply

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Sidebar

Newsletter Signup

Subscribe to our weekly newsletter below and never miss the latest product or an exclusive offer.

Enter your email address

Categories

  • Banking
  • Consumer Rights
  • EPF and PPF
  • Insurance Planning
  • Investment Planning
  • Mutual Fund
  • Real Estate
  • Real Life Stories
  • Retirement
  • Tax Planning
  • Uncategorized

Subscribe to our YouTube Channel

Recent Posts

  • Latest NPS exit and withdrawal Rules 2021
  • Interesting Tax Dispute – Whether Sachin Tendulkar Actor or Cricketer?
  • List of Index Funds in India 2021
  • 7.15% Power Finance Corporation NCD Bonds 2021 – Review
  • ENEMY No.1 of your investment
  • 39 Year Multimillionaire’s Tesla stock value is Rs.83 CRORE – What we can learn?

Are you looking for Unbiased, Simple and Conflict-Free Financial Planning Service?

We neither SELL any product nor representative of any Insurance or Mutual Fund Companies.

We offer you an unbiased Fee-Only Financial Planning Service.

GET STARTED

    Follow along on social media

Get in touch with us here

Address: Basavaraj Tonagatti,
1446, Aastha, Sir M Vishweshwarayya Layout, 5th Block, Bangalore-560056.

Phone: (+91) 9019580450

Email: tonhokrani@gmail.com

Subscribe to our newsletter

Newsletter Signup

Subscribe to our weekly newsletter below and never miss the latest product or an exclusive offer.

Enter your email address

© Copyright 2020

Return to top