Personal Finance

Time to shift to higher yielding deposits

Suresh Parthasarathy | Updated on March 05, 2011 Published on March 05, 2011

I had deposited Rs 3 lakh in a bank for three years at 8 per cent seven months ago. With interest going up, is it advisable to close the deposit and deploy the proceeds in a bank that offers higher interest? When I approached my banker, I was told that if I pre-close the deposit, I am eligible for an interest of 5.5 per cent only. Is this correct? — Kannan

As you have not disclosed if your banker will charge any penalty for the pre-closure, we presume your loss will be mainly on account of change in interest rates. If you continue your deposit till maturity, you will receive Rs 3.78 lakh . But if you pre-close the deposit your loss will be Rs 4,375 due to lower interest. But by deploying the pre-closure proceeds at 10 per cent interest for the remaining 2 years and 5 months, you gain Rs 5,400. So it is prudent to close your deposit and enjoy the extra income from higher rates.

I would like to buy the bonds issued by Tata Capital issued in February 2009 that carry 12 per cent annual interest as these bonds are listed. Is it advisable to buy the cumulative interest option bonds, and will interest paid at redemption attract long-term capital gains tax? — S. Jagadisha Rao

Banks offer 9-10 per cent interest for three periods, but they are not tax efficient. But debentures such as Tata Capital non-convertible debentures (NCDs) are fixed income instruments where the insurer pays a fixed interest. Being a fixed-income instrument, it cannot be converted into equity. NCDs are tax efficient mainly on account of the fact that they are listed on a recognised stock exchange. Tata Capital NCDs (cumulative interest option) are currently quoting at Rs 1,279 on the National Stock Exchange. If you buy this bond now and hold it for three years, the effective yield on investment will be 11.2 per cent which is better than the returns offered by the fixed deposits. As this bond is listed, the market prices of the instruments will carry interest rate risk. Rising interest rates will reduce the price of the bond and vice-versa.

If these bonds are held for at least 12 months , the capital appreciation are taxed as long-term capital gains. The capital gains arising on account of the transfer of long-term capital bonds are subject to a tax rate of 20 per cent of capital gains calculated after reducing indexed cost of acquisition; or at 10.3 per cent of the gains without indexation.

I have taken a home loan for Rs 34 lakh with SBI Maxgain OD scheme for 25 years at floating interest. Under this account, amounts in my savings bank can be transferred to the home loan account, which acts as OD account and interest is charged on the outstanding loan account. I have Rs 8 lakh in anther account. As no pre-payment is allowed in the home loan before 10 years, is it worth transferring my surplus to Maxgain OD? Is it worth transferring my home loan to a bank, where part prepayment option is allowed to maximise gains? — Nitin Kanungo

This loan is granted as an overdraft facility with the added flexibility for you to operate your home loan account like your SB or current account. The product minimises your interest cost by enabling you to park surplus funds with the benefit to withdraw the funds whenever needed. With cost of borrowing going up on home loans, it is better to deploy the surplus to reduce the interest outgo. Even if you are considering deploying the surplus in bank deposits, with your tax bracket of 30 per cent, post-tax returns will be lower than the benefit availed from the home loan account. Hence it is better to transfer the surplus to this account.

The only disadvantage is that if you have rented your house and are enjoying the entire interest paid as deduction, keeping surplus in OD account will not be ideal.

If you borrow from other bank and settle the loan account, prepayment penalty and cost of processing a new loan would be unattractive. So we suggest you continue your home loan with SBI.

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