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

Source :Raj Pradhan : Money control ;9 jan 2012


SBI’s tax saving deposits advertisement claims to give you 17.77% return. While it assumes you are in the 30% Income tax slab 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.