Money Talks- Part 5

So after having understood the need of investment, post tax return and risk return taking ability during different life stages, lets now understand different investment options.

Let’s start with fixed return investments ie Fixed Deposit (FDR) and Recurring deposit (RD).

  • Both offer fixed Rate of interest (ROI). So one knows well in advance what is the amount which would be realized at the end of tenor/ maturity.
  • Both are taxable. So take into consideration the post tax returns. Banks deduct TDS amount post a threshold amount in case of FDR’s.
  • Both can be done for short as well as long duration and withdrawal can be made before expiry also subject to lower ROI/Penal and excluding tax saving FDR’s. Tax saving FDR are for 5 year period and amount invested for the same is eligible for Sec 80 C deduction. Interest received on same is taxable.
  • If certainty of amount is of essence these are the best options.

For those who are new to RD, FDR is one time deposit and RD is regular which generally ranges from 6 months onwards.

FDR can be done for a few days also. However if you are breaking the FDR there is penalty and / or lower ROI payable.  ROI of the applicable tenor when you are withdrawing the amount prematurely is paid and/or penalty generally is 0.5% to 1% of applicable ROI.

So if the surplus is for very short duration say upto 30 days then you need to look at saving interest which currently is around 3.5% (4% for if amount maintained is > Rs. 50 lacs) for most banks and interest on FDR for that period.  Note that Saving account interest upto Rs. 10000 is tax exempt.



Let’s understand the key considerations while investing and we will then take each of them one by one:

  • What amount of risk you can take?
  • What is your investment horizon?
  • What is post tax return?

We will start from the third one. What is the impact of tax on different instruments we can invest money.

  • So say hypothetically one instrument offers return of 10% annually which is taxable and another offers 8% which is tax free.
  • If your effective tax rate is 25%, then the post tax return in first is 7.5% which is lower as compared to 8% in second option. But if your effective tax rate is 15%; then first option offers returns higher.

Below table depicts the four scenarios-

  Instrument 1 Instrument 2
Return 10% p.a. 8% p.a.
Tax Treatment of returns Taxable Tax free
Tax applicable    
Scenario-1- 25% Tax 7.5% p.a. 8% p.a.
Scenario-2-15% Tax 8.5% p.a. 8% p.a.


The key point is while looking at the return of any instrument you must look into post tax return of the instrument in terms of instrument and your tax bracket.