What is alternative to long term RD?

POSTED BY Kulkarni P ON December 24, 2011 9:59 am COMMENTS (9)

A quick question from my side.

I am planning to open 10 year RD account with SBI to lock-in high interest rate. What are the other options do I have considering tax implication of RD at the time of maturity.

Thanks,
Kulkarni

9 replies on this article “What is alternative to long term RD?”

  1. Dear R Siva Prasad, Please do note RD interest is not liable to TDS (FD as well as SB interest is liable to TDS) but it does not mean that it’s tax free. It’s taxable. Considering that the RD ‘ll mature after 10Y & there is every possibility that all along these 10Y you ‘ll gradually move to higher tax slab may be 20% if not 30%. So the actual interest after tax adjustment ‘ll be lower than what it seems. To keep it simple –

    The 9.25% rate ‘ll become actual rate

    @ 20.6% slab = 7.35%
    @ 30.9% slab = 6.39%

    On the other hand PPF or Debt fund are better equipped in terms of taxation. Yes in case the bank RDs are opened in the name of persons who are out of tax bracket & ‘ll remain so, these RDs ‘ll be surely a winner. Say your mother who is a house wife & do not have any other income.

    Thanks

    Ashal

  2. Dear Ashal,

    Can You please explain again? I am in confusion whether to start RD or PPF or Debt Mutual Funds for longterm and short term? I am already investing in Equity Funds.
    Iam under 10% tax liability.
    I feel RD is for Short Term. But LongTerm, which is best option i.e PPF or Debt Mutual Funds?

    Thanks for your advice.

    R Siva Prasad

  3. Dear Siva, Even if a debt fund is giving a return of just 8%, for the long term capital gains (holding period more than 1Y), the net return due to tax liability @ the rate of 10.3% with out indexation ‘ll be 7.13%. Which is far better than 6.5% return for a 30% tax slab person.

    There is more to it – As this is LTCG capital gain, the same can be adjusted against STCL as well as LTCL to minimize tax liability.

    Thanks

    Ashal

  4. Dear Kishore.Vimta, Please do not mix up things. Here I tell to invest in the name of minor kids only in RD & that too if within the next 10Y term, the Kid is going to become a major. In simple words – if the kid’s age is more than 8Y, the bank RD can be opened for that 10Y term. At the end of term i.e. age of 18 of the kid, the RD ‘ll mature & the income ‘ll be accrued in the name of Kid. In all probability at that time, the kid ‘ll not have any income & ‘ll qualify easily for that zero tax slab.

    Thanks

    Ashal

  5. For someone in 30% tax bracket 9.25% will translate to a 6.475% post-tax return.

    In Debt funds – one can opt for dividends which will be taxed at 15%.So even a return of 8% in Debt funds will translate to 6.8% real return beating a FD/RD.

  6. Dear Sir,

    RD in SBI will give 9.25% interest, with no risk.
    I did not found any Mutual fund (Debt), that gives morethan 9.5% in Long Term (5Years), with or without risk.
    Please tell me any Debt fund that gives Interest rate morethan RD in Bank.

    Thank You
    R Siva Prasad
    Aurangabad

  7. Abhishek says:

    Hi

    Have a look at Debt Funds for long term as an alternative to RD. Thats an option you have considering tax as well..

    Happy Investing !

    Regards

  8. Dear Kulkarni, the RD may be opened in the name of your child who is going to become major during these 10Y, if applicable to you. Apart from that you may invest under your mother’s name if she is a housewife or father if he is retired.

    Thanks

    Ashal

    1. kishore.vimta@gmail.com says:

      Mr. Ashal

      Do you mean to say, FDs deposited on minor name or senior citizen name are tax free, while doing redemption.
      Kindly correct me.
      thanks, Babu

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