Taxation
SBI tax saving deposits—can it really fetch you 17.77% return?

SBI’s tax saving deposits advertisement claims to give you 17.77% return. While it assumes you are in the 30% tax bracket at the time of investment, it conveniently calculates the return without considering tax obligation on the interest generated at the time of exit


During the tax savings season, people are desperate to save Rs30,900 in taxes by investing their hard-earned Rs1 lakh in certain kinds of savings instruments. One such avenue is a tax-saving fixed deposit (FD) which is for a five-year term without option for premature withdrawal. SBI has put a front page advertisement in Times of India and other leading national dailies claiming to give 17.77% effective annual yield. It assumes you are in the 30% bracket (which may not be true) and it gives an effective annual yield without considering the tax on the interest generated, which could be up to 30%.

While your effective annual yield will vary based on your tax bracket at entry and exit, SBI’s calculations in the advertisement shows the slick marketing which wants to consider highest possible tax savings on entry and no tax liability on exit. It is misleading to an average investor who can get dazzled by the big returns claimed in the advertisement.

This kind of advertisement is usually seen with infrastructure bonds giving tax benefit under 80CCF for Rs20,000 investment. Last year, IDFC bond claimed a tax-adjusted yield of up to 17.85% to investors on buyback (after five years for 10-year bond), which was confusing to the average investor. The company was offering 8% return last financial year.

On a positive note, SBI’s rate of interest for tax savings five-year FD is 9.25% per annum (p.a.) which is also the same as it offers for regular FD. In the past, tax savings deposit FD used to offer a little lower rate than the regular FD. With tight liquidity for banks, they want to entice deposits with high interest rates.

It is important to note that there is no option for premature withdrawal even with penalty for tax savings FD and the interest is taxable. There are other better options for tax savings under 80C. Consider all the options before jumping in with tax savings FD.

SBI has been advertising heavily for attracting big deposits. It is giving 8.5% p.a. interest for deposit of Rs1 crore and above for only seven-day FD. This is a good option for high-net-worth individuals, who want good return as well as liquidity.

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COMMENTS

lindadale

4 years ago

If we are judging only on numbers then it will be surely confusing to calculate.I never had any account with SBI but your information surely helpful for me to get some new ideas.http://www.axisbank.com/personal/deposit...

nagesh kini

4 years ago

Only juggling with numbers - one bank offer doesn't differ from others!

nagesh kini

4 years ago

Only juggling with numbers - one bank offer doesn't differ from others!

nagesh kini

4 years ago

Only juggling with numbers - one bank offer doesn't differ from others!

nagesh kini

4 years ago

Only juggling with numbers - one bank offer doesn't differ from others!

sushant

4 years ago

What are other options
Almost every option has similar kind of benefits and flaws

So no worry if we go with FD or ELSS or NSC or post office stuff

Everything is almost on same line and you have to bear 3-5 years of locking with no option for withdrawal even with penalty
-SushantSupriya.com

kishor thakre

4 years ago

i want fd 30000/- tax saving schime.

faisal

4 years ago

see

Sanchita

5 years ago

Sad to see a bank like SBI doing this. i did see the ad on the TOI front page and took out pencil to calculate myself. someone who is with no other income may gain, but then he also need not save any tax, the basic premise of investing in these FDs. i am somehow not comfortable as the real rate of return will be negligible after taking into account what the taxes and inflation will eat of the interest that i m supposed to get...

Sanjaya M

5 years ago

It is good eye-opening article. It is true that the advertised yield is not correct as we have to pay tax on interest at the time of repayment. Some other banks are offering higher interest rate also. People should explore.

Paddu

5 years ago

The 80CCF bond "yield" calculations are kind of worse as the so-called "yield" is calculated assuming not only 30.9% tax saving and 0% tax on interest but also that the interest is reinvested at the humungous "yield" rate advertised.

So 8% IDFC annual interest bonds have a "yield" of 17.85% assuming 30.9% tax saving, 0% tax on interest and interest being reinvested at 17.85% annual return!

Thankfully SBI didn't take a cue from that and advertise the yield for their quarterly interest product instead of cumulative interest!

REPLY

Paddu

In Reply to Paddu 5 years ago

The dubious "yield" values for quarterly 9.25% for 5 years would be 18.95% and for 9.75% for 5 years would be 19.58%! This is of course assuming 30.9% tax-saving, 0% tax on interest and interest reinvestment at 18.95%/19.58% as the case may be!

ajit

5 years ago

I have never been a fan of anything that SBI has done and their customer service literally sucks. A visit to any branch will reveal the utter disregard their staff have for customers and the total chaos that reigns there. Some staff try to get up and do some work but they are mostly sidelined by their colleagues and soon become part of the pathos that is what SBI usually is. Some of their mutual funds are well managed but only just. The apathy seems to be creeping there too. It is not surprising that with such a background these misleading ads are cropping up and I would like for your magazine and all the public that are reading to make an effort to spread the word about this gross misconduct and give them a fitting reply i.e. do not do business with crooks in any form, shape or size. My standard practice has been to equate big business with big crooks until proved otherwise.

Akash Vachhani

5 years ago

Its a great another example of how these paper investment products like insurance, mutual funds and now Bank FDs also mislead people.

I think SO CALLED REGULATORS must be sleeping now, and after one year regulator will come in picture with SO CALLED NEW CIRCULARS, AMENDMENTS, DUE DILLIGENCE ETC ETC ( as usual happens ), and will give BIG BIG statements in press conference in this regard and will make feel investors that we are also doing something for you.

Nagesh Kini FCA

5 years ago

The deregulation of interest has ushered in rate wars.
This is all glib ad. gimmick.
A lot of pensioners are window shopping all day at banks only to be confused at the end of their tiring day - rates and tenures vary making an informed choice difficult.
Any educative solutions from the financial literacy point of view?

AThiagarajan

5 years ago

Is it true? If it is really the case, can't the RBI/SEBI or AdSBI do something about such misleading conduct? If someone ( say a depositor) goes for legal action ? As the India Tourism Board claims, without a sense of irony: Incredible India!

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