Take a tax break... a must read

The financial year is drawing to a close and taxpayers have started looking for options to minimize taxes. However, you will be happy to know that the income tax act offers many more incentives and allowances, apart from the popular 80C, which could reduce the tax liability substantially for salaried individuals.

The components of salary include basic salary, dearness allowance (DA), house rent allowance (HRA), conveyance, city compensatory allowance, variable incentives and perks.

You can opt for the following options to get tax benefits.

Salary restructuring with allowances and perks: Instead of going for a high basic salary, you can take reimbursements, allowances and perks, which are exempt from tax. However, your employee provident fund (EPF), gratuity and superannuation are all a percentage of your basic. So, by reducing your basic to allow for higher allowances and reimbursements, you will reduce your EPF, gratuity and superannuation. While EPF is totally tax-exempt, gratuity up to Rs 10 lakh is non-taxable as also the commuted pension portion of superannuation.

Transport allowance: Transport allowance provided by an employer for commuting between your residence and your place of work is exempt up to Rs 800 per month (if free conveyance is not provided by the employer).

House rent allowance: Individuals living in a rented accommodation should include HRA as part of salary. The least of the following amount is exempt under Section 10(13A): i) HRA actually received; ii) Rent paid in excess of 10 per cent of salary; iii) 50 per cent of salary (if rent paid in a metro), or 40 per cent of salary (other than metro city).

Maximum benefit of HRA can be derived by having all the above three components to be of more or less the same amount. Salary for this purpose means: Basic plus DA (forming part of benefits) +commission on sale at fixed rate. There is no exemption if you live in your own house or a house for which you don't pay any rent. You have to provide to the employer a proof of the rent payment. However, if the HRA is up to Rs 3,000 per month, you don't need to provide a receipt to the employer.

HRA and home loan: Suppose you are living in a rented house in the city where you work and you are repaying a home loan on a property elsewhere. In this case, you can get HRA deduction as well as take the tax benefit of the home loan. The provisions dealing with HRA and home loan benefits are separate in the income tax act. (rental income is taxable after standard deduction of 30 per cent).

Leave travel allowance (LTA): You can claim your LTA, which is available twice in a block of four years.

It is based on expenses actually incurred on travel fare, if (i) the travel is undertaken by you and can include your family members; and (ii) is for proceeding on leave to any place in India.

The LTA block is measured in calendar years; the current block is from January 1, 2010, to December 31, 2013.

"Family" here is defined as spouse, children, parents, brothers and sisters. Family members have to be wholly or mainly financially dependent on you for claiming LTA. Also, LTA exemption does not apply to more than two children born after October 1, 1998.

If you cannot take the benefit of LTA in a block, only one of the two allowed journeys can be carried forward. It should be carried forward to the first calender year of the immediately succeeding block. The carry forward has no detrimental effect on the new block of four years.

Apart from one journey carried forward from the last block, you will still be eligible for LTA of the two journeys in the new block.

The exemption on LTA is subject to limits. For example, if you travel by air, the exemption will be on economy class air fare of the national carrier by the shortest route to the place of destination, or amount actually spent, whichever is less.

Where the places of origin of journey and destination are connected by rail, the exemption will be equal to AC first class rail fare by the shortest route to the place of destination or the amount actually spent, whichever is less.

You can also claim exemption on the following:

Children education allowance: up to Rs 100 per month per child for maximum two children

Hostel expenditure allowance: Rs 300 per month per child for maximum two children

Allowance to meet the cost of travel on tour or transfer, including packing and transportation of personal items

Allowance on tour or for the period of journey in connection with the transfer to meet the ordinary daily charges incurred by employees during absence from their normal place of duty

Allowance to meet expenditure incurred on a helper, who is engaged for the performance of duties of an office or employment of profit.

Allowance for encouraging academic, research and training pursuits in educational and research institutions

Allowance to meet the expenditure incurred on the purchase or maintenance of uniform to be worn during performance of duties.

Amount of employer's contribution towards recognized PF (up to 12 per cent of salary); approved superannuation fund; group insurance schemes; employees state insurance schemes; fidelity guarantee scheme.

Any allowance to compensate for the increased cost of living prescribed under Rule 2BB. It includes city compensatory allowance, border area, hilly area and field area compensatory allowances, special allowance to members of armed forces, subject to limits under Section 10(14).

Knowing these alternative avenues to trim your tax liability will help you avoid last minute hassles of tax planning. Plan well in advance to file well in time.

Courtesy : Yahoo Finance

Spend for your kids, get tax benefits

In today's world of ever increasing expenses, spending on your children results in a substantial outflow from your pocket. However, did you know that you can get tax benefits on many expenses and investments made in your child's name? This includes a wide variety of expense heads and investments. Most of these investments fall under the ambit of Sec 80C within the Rs. 1 lakh limit. Here are a few such cases, which will help you reduce your tax outflow:

Interest on Education Loan: The cost of education for your child is a huge outflow, and needs to be well planned. Most of you may opt to take a loan to fund your child's higher studies. While this results in a repayment burden, you can gain partially, as the interest portion on education loan is fully tax deductible under Section 80E of the Income Tax Act. This loan can be taken by the borrower, parent or spouse of the student from a recognized financial institution. The loan must be taken for a full-time course, which can either be a graduate course in engineering, medicine or management or post graduate course in engineering, medicine, management, applied sciences or pure sciences including mathematics and statistics.

Payment of tuition fees: Tuition fees paid by the parent to fund his child's education in any school, university, college or any other education institution within India can be deducted under Sec 80C, upto Rs. 1 lakh in a year. The amount of deduction is restricted to two dependent children and should pertain only to actual tuition fees paid. However, both husband and wife have a separate limit of two children. So each parent can claim for two children each.

Health insurance premium: When you take a health insurance for your child, you can claim the premium paid as a deduction from your income, upto a Rs. 15,000 in a year.

Expenses on treatment of disabilities and certain ailments: The Income Tax Act allows the parent to claim a deduction from his income, an amount incurred towards treatment of specific disabilities and illnesses of his child under two sections. Sec 80DD of the Act states that expenses incurred towards medical treatment of dependent children suffering from a disability are eligible for deduction. The limit of deduction under this section is Rs. 50,000 for a normal disability (impairment of atleast 40%) and Rs. 1 lakh for severe disability (impairment of 80% or above). Sec 80DDB of the Act allows expenses incurred towards treatment of specified illnesses for children to be deducted from income, upto Rs. 40,000.

Deduction of allowances: There are a host of allowances specified in the Income Tax Act, which is allowed by an employer as a deduction from the income of the employee. The first is a hostel allowance of Rs. 300 per month per child, upto a maximum of 2 children. However, these expenses need to be incurred in India. The next is an education allowance, wherein Rs.100 per month per child upto a maximum of two children is exempted from income. Here also, the expenses need to be incurred in India. Medical expenses incurred for dependent children are allowed as a deduction upto Rs. 15000 per year on furnishing of medical bills. Most of these upper limits are those which have been set several years ago, and seem like an insignificant amount today, on the back of growing inflation. Several representations have been made to the Government to increase the exemption limits of these allowances.

Minor child's income: When you make investments in your child's name, the income earned from these investments will be clubbed with your income. However, if you have invested anywhere in your minor child's name and this investment generates an income, you can claim upto Rs. 1500 as a deduction on this income. This is available for up to two children. For example, you can invest upto Rs. 15000 in a long term FD which gives an annual return of 10%, and be exempt from tax. Remember that if the interest is on a compounding basis, the interest amount will grow over the years, resulting in an increase in tax liability.

Formation of a Trust: You can set up a trust in your minor child's name to save on tax. You will need to make an irrevocable transfer to the trust, so that the money will not be claimed by you. When you make investments through this trust, the income made through these investments will not be clubbed with your income. Even though the trust has to pay tax on this income, the total tax liability will be lesser if the income is clubbed with your income.

When you have children, you will be forced to incur various kinds of expenses on them. A smart investor is one who knows how to get maximum benefit on the expenses incurred on his children, as well on the investments made in their name.

Courtesy : Reuters

Here's how economic indicators can affect your financial life

You couldn't have escaped some of these statements in the recent past: The market has tanked, the GDP figures were disappointing. 

Sure, the disappointment in the tone and falling economic indicators must have caught the attention of every investor.

But what most have missed is that the market is increasingly getting influenced by economic indicators and events — that too in faraway lands — in a big way.

Therefore, it is important to keep a close eye on the developments in this space. Also, all these events cannot be seen in isolation.

Read on to understand the impact of five such factors on your financial life:

Gross domestic product

You must be familiar with opinion pieces that talk about how India, after witnessing the highs of over 8-9% growth in the previous decade, is crawling at a growth rate of just under 5% now.

Ratings agency Crisil, in a report released recently, said the growth estimate has been reduced to "a decade-low of 4.8%" for 2013-14.

In simple terms, the Indian economy is expected to continue to be sluggish. Slower growth, thus, dents job prospects, forcing many to rein-in their aspirations and reset the timelines of their financial goals.

Inflation

Given that price rise has been the one of the chief causes of governments being voted out of power in the past, it would be safe to assume that even laypersons are aware of how inflation — rate of growth in prices — affects their consumption spends.

From an individual's perspective, the consumer price index (CPI) and food inflation are more relevant than the wholesale price index (WPI) inflation. As per the figures released by the commerce ministry, CPI inflation for August 2013 is down to 9.52% from 9.64% in July.

Wholesale price inflation, on the other hand, inched up from 5.79% in July 2013 to 6.1% in August. Food items were costlier by 18.8%, compared to the same period last year.

RBI’s monetary policy

The Reserve Bank of India, through its policy measures, influences the interest rate movements in the market using several tools at its disposal, including repo and reverse repo rates.

Any action on this front directly impacts interest rates in the system, which in turn affect your home loan or fixed deposit rates. For instance, a hike in the repo rate could push up the interest rates on your loans and also deposits.

Therefore, it is important to understand the implications of changes in policy rates. "This helps us understand at what rates RBI is willing to lend and borrow from banks.

This, in turn, helps us gauge if banks will provide cheaper loans going ahead or will they become more expensive.

This can help individuals plan long-term money commitments, which require loans or mortgages, better," says Apte.

Exchange rate

Though it is now hovering around the Rs 62-levels, the freefall of the rupee, which has depreciated by around 15% since May visa-vis the US dollar, has been the subject matter of a number of news reports, analyses and, of course, jokes.

On Tuesday, the rupee ended at Rs 62.46 to the US dollar.

For individuals, the immediate impact is seen in the form of rise in inflation.

A diminishing rupee adds to the expenses of travelling abroad, particularly the US — be it for leisure, business or studies. Moreover, it adversely impacts corporate earnings, barring export-dependent sectors like IT, taking a toll on your equity investments.

Stock market indices

An indicator of the economic situation and the level of business confidence in the country, any rise or fall in Nifty or Sensex is directly reflected in your equity investments — stocks or mutual funds — on a daily basis.

Moreover, they give a sense of where the economy is headed.

"These indices are keenly watched by investment professionals, as they tend to be the barometers of economic conditions in the industry and hence, the economy as well," says Apte.

Courtesy : economictimes

Want to withdraw from your provident fund account? Here's how!

A provident fund (PF) is basically a plan to provide financial security after retirement. It is, therefore, not advisable to withdraw any amount from one's provident fund account as PFs are primarily meant for retirement planning, and retirement planning is the most important goal in any person's life.

"No need to say one should avoid doing so unless there is a great emergency, as the amount should be utilized post one retires or in case one stops working and his/ her earnings have depleted. For other emergencies, one should look at money from investments in other instruments like debt funds, liquid funds or a savings bank account, etc," suggests Anil Chopra, Group CEO, Bajaj Capital.

In fact, there are various advantages of investing in a provident fund (PF). Generally, the return on provident fund is higher than inflation, and is totally tax fee. Thus, withdrawing out of it would have the following consequences:

1) Retirement planning would go haywire

2) Tax-free status would be lost because that money cannot be put back. For example, let's say, someone has a balance of Rs 50 lakh in his provident fund account, and he wishes to withdraw Rs 25 lakh out of that. This amount of Rs 25 lakh cannot be put back into it later, as it is not allowed as per rules.

Therefore, "withdrawal from a PF account is generally discouraged, as the purpose of opening it and accumulating money there is mainly for the second innings of your life, which is post retirement," says Chopra.

Nitin Vyakaranam, Founder & CEO, Arthayantra.com, is of similar opinion. "Withdrawing PF stands out as the classic case of lack of prioritization and holistic approach in our financial decision making process. By making withdrawals from the PF to fund other goals, we end up pushing our retirement age or making higher contributions towards building retirement fund during the last few years of our employment," he says.

However, in case one wants to withdraw money from his/ her PF account, the rules for the same are very stringent, which also vary as per the types of provident funds. In India PFs are of three kinds:

a) Public Provident Fund (PPF) - For general public

b) Employees Provident Fund (EPF) - For private sector employees

c) General Provident Fund (GPF) - For government sector employees

In case of PPF, which is normally meant for 15 years, withdrawal is allowed before that also, but under very stringent norms. For example, no amount can be withdrawn at all for the first six years. After six years, the amount equivalent to 50 per cent of the balance, which was there more than 3 years ago, can be withdrawn. Thus, the entire money cannot be withdrawn before the end of 15 years. Even after 15 years, it can be rolled over for another period of 5 years and after that every five years it can be rolled over or closed.

Similarly, in case of EPF or GPF, withdrawal is not allowed generally unless one has given up working or wants to be self-employed, etc. As per EPF rules, you are allowed to withdraw money only if you have no job at the time of withdrawing your fund and if 2 months have passed. Only transfer is allowed in case you have switched to a new job. Some people, however, withdraw the EPF after 60 days of leaving the organization, stating that they don't have any job, but this is illegal as per the EPF rules, if you are doing so after switching to a new job.
Thus, if you have no job at the time of withdrawing your fund and if 2 months have passed after leaving your organisation, then you are allowed to withdraw the fund. A declaration is required to be given stating the reason for the same. Otherwise, partial withdrawal is allowed in certain cases, which is in the form of loan, where one has to pay back that amount later and before that, has to state the reason for opting for withdrawal, for example, self or daughter's marriage, buying a home, education of self or children, medical treatment for self or family, among others.

There are certain specified criteria under which partial withdrawal is permitted. In case of education or marriage, for instance, the employee should have completed at least 7 years of employment or service. The maximum aggregate withdrawal can't exceed 50 per cent of the total contributions made by you and withdrawal can be made only thrice during a person's total service tenure. Proof of education or wedding is also required to be submitted.

Likewise withdrawal is permitted for medical treatment of self, spouse, parents and children. In this case, however, there is no restriction regarding the number of years of service. But the maximum amount one can withdraw is six times the basic salary and proof of hospitalization is required.

In case you wish to withdraw from your EPF account for purchase/construction of a house, then you need to have completed at least 5 years of service. The maximum withdrawal amount is 36 times your monthly salary (for construction of property) and 24 times (for purchase of property). In this case withdrawal is allowed only once during the entire service tenure.

For alteration or renovation of house, withdrawal is allowed up to 12 times your monthly salary and only once during the entire service tenure. But the house need to be registered in your or your spouse's name or should be owned jointly.

If you need to withdraw for repayment of home loan, then you should have completed at least 10 years of employment. The maximum withdrawal amount is 36 times the monthly salary of yours and withdrawal is allowed only once during the entire service tenure.

If one has retired or stopped working, he/ she needs to fill a PF withdrawal form and share his/ her bank account number, which has to be counter signed by the employer. After this, the money is directly sent to one's bank account. The process takes longer in case of EPF - anywhere between 2 weeks to may be up to two months also.

"On the other hand, if you have a PPF account, withdrawal is very easy after completion of 15 years. You can collect the demand draft or cheque by going to the post office or bank on the same day or get the money transferred in your bank account. Thus, one can get the money in a day's time," informs Chopra.

Also, if one wishes to withdraw before the end of 15 years, let's say 6 years, the amount which can be withdrawn as per rules will be calculated, and by filling an application in the prescribed format, it can be taken out maximum in one day's time. Thus, withdrawing from PPF is easier than withdrawing from EPF or GPF.

Courtesy : economictimes

Claiming health insurance from multiple insurers!

Narendra had to undergo an angioplasty surgery suddenly. His family was convinced that his old health insurance policy worth Rs 75000 bought 10 years ago would be sufficient to meet the expenses of surgery and hospitalization for 4 days. They were in for a rude shock when the bill came up to Rs 185,000. Health and hospitalization costs have gone up during the recent years and a single health insurance policy bought years ago, often falls short. Having more than one health insurance is very common these days. One may be the one that your employer gives you and the other you might have bought as a personal cover.  You may also have one policy to cover your parents and the other may be for your family.

You bought these covers to be doubly sure. However, what do you do in case of a hospitalization? How do you claim? Will it be from both the insurers, what proportion etc are some of the doubts that arise in the minds of the insured?

There has been some recent change in the rules regarding claiming from multiple insurers. The IRDA (Health Insurance) Regulations 2013 announced this February changed the way claims are made from each of the multiple insurers. Prior to these rules any claim from multiple insurers had to be in the ratio of coverage.

For Ex: You had a 2 lakh policy from your employer and 1 lakh policy bought on your own. There is a hospitalization for Rs 75000, then you would have to inform both the insurers and the claim settlement would be made according to the contribution clause. In this case your employer insurance would pay Rs 50000 and Rs 25000 by the insurer of your private policy. This process was not customer friendly and presented many hurdles to the insured.

However, after the new regulations have been put in place, there have been many changes. You can decide to against which insurer you would like to claim. If the amount of claim is less than or equal to the amount insured then you can claim the entire insurance from a single agency.

Let us see in the above case, how would this work out. The claim amount is Rs 75000, so if you go the group insurance company (employer), the claimed amount is less than the sum insured, so they will pay the entire amount. And in case you approach the second insurer (personal policy), this company would pay the entire amount, as the claim is less than the total amount insured.

Let us also see an example where the claim amount is Rs 250000. Here the claim amount is higher than the amount insured, then any single insurer cannot settle the claim, hence the contribution clause will have to be applied. Your company insurer will be pay Rs 166667 and Rs 83333 by your second insurer.

Keep in mind that documentation will have to be complete with each of the insurers. You would need to submit the entire sets of documents to both the companies. Hospital would have to give you a certified set of copy of the bills and other documents in addition to the original documents. So keep in mind, more the number of policies you would have to deal with more documentation. The documents required by each insurer may also differ.

Now that the rule is simple, you should know the process that will have to be followed for claim settlement and the ways to maximize your claim. The process that would have to be followed is

Inform all the insurance companies about hospitalization, at the same time you would also require to pick the company that you will claim first from. At the time of discharge, you would need to fill up the form for claim with all required documents. Remember you would need to submit the original documents to the insurer from who claim first. You would need to keep attested copies for your next claim.

Here, an important thing that you would need to keep in mind is that, only after the claim from the first insurer is settled, you can submit your claim with the second insurer. The first insurer will issue a claim settlement certificate, which will have to be submitted to the second insurer. Accordingly, the third claim can be claimed only after the second is cleared. Each claim may take around 30-45 for clearing, more the number of claims, more time taken in entire claim to be settled.

In case if it is a cashless claim, only the claim from first insurer is settled cashless and subsequent claims will have to be claimed on a reimbursement basis.

Some points to be noted to maximize your benefit:

§ Always claim insurance from your group insurance first, as the claim settlement would be faster. Also you would save on your no-claim bonus or premium loading during your next renewal of personal health insurance policy.  Generally group insurance covers pre-existing illnesses and does not have waiting period unlike individual health insurance policies.

§ Try and have a big cover from one insurer, also pay attention to the exclusions that the policy may have.

Are zero percent interest schemes really that?

These schemes do tend to have a big influence if you are someone looking to buy something, which otherwise would be well beyond your reach! You buy their theory of ‘zero percent finance’ and pay installments which you strongly believe are interest free! But unfortunately you end up paying more than what you actually think you are!

There is a popular saying: “There is no such thing as a free lunch!” And Ramesh now fully endorses it! But not long before he completely disagreed on this thanks to the zero percent finance schemes offered by some NBFCs (non banking finance companies) with which he had bought a couple of consumer durables for his home! He blindly believed that the zero percent finance schemes were in fact zero percent in reality until the time one of his wise friends enlightened him on how these schemes really work! Well, this is what he found out!

What are they?

Till a few years ago there were many such zero percent finance schemes doing the rounds and luring the unaware buyers like Ramesh into it! Thanks to the regulations of the Reserve Bank of India (RBI) many banks have now stopped offering such schemes for financing consumer durables but still there are several NBFCs who continue to offer these so-called zero percent finance schemes! Hence the recent announcement by RBI which banned zero percent interest loans on EMIs to credit card holders, stressing on the removal of this practice!

These schemes do tend to have a big influence if you are someone looking to buy something, which otherwise would be well beyond your reach! You buy their theory of ‘zero percent finance’ and pay installments which you strongly believe are interest free! But unfortunately you end up paying more than what you actually think you are!

How do these schemes work?

Firstly these zero percent schemes have hidden costs inbuilt in them. Perhaps the biggest loss for you would be forfeiting the cash discount on a product that you could have otherwise got if you had bought it on full cash. This apart you will also be paying a transaction or processing fee under the zero percent scheme and consequently more money through advance EMIs.

For example, you decide to buy an LCD colour television that costs around Rs. 48,000. You decide to buy it using the zero percent finance scheme. Under this arrangement you will pay the entire cost in six EMIs of Rs. 8,000 for six months. This works out to be Rs. 48,000 spread over 6 months. Now here’s how you end up paying more! To begin with you pay a processing fee of Rs. 1,000. And since you are buying the LCD on a zero percent finance scheme you are not entitled to the cash discount of Rs. 2,000!

So here’s how it looks in the above example. The LCD costs Rs. 48,000! Add up the Rs. 1,000 processing fee that you pay initially and Rs. 2,000 that was lost out on cash discount. A total of Rs. 3, 000! This means you get a net finance of Rs. 45,000 only! Now you pay an EMI of Rs. 8,000 for 6 months which totals up to Rs. 48,000. So at the end of six months you pay Rs. 3,000 more for what you got.

Are they genuine?

It is an irrefutable fact that the demand for these schemes is highly felt during the festive season. Market experts believe that there is a marked spurt in sales of consumer durables due to these zero percent schemes. The consumers wouldn’t mind opting for these schemes as it is a fact that paying by credit cards is comparatively expensive than purchasing through these schemes. Also, these schemes have minimal paper work, and some friendly eligibility criteria. However, it takes some understanding of the basics to find out if they are genuine or not!

How to decide if the scheme is actually zero percent?

It is always better to ask some basic questions to find out if the zero percent schemes are actually zero percent! Find out if you are eligible for any discount if you pay the full amount and if there are any transaction charges for the finance scheme and if the answer is no for both the questions then you might consider yourself lucky that the zero percent schemes is actually zero percent.

Are there any  zero percent schemes at all?

Well there are schemes that could fall in the category of being  zero percent but these are available in a different form! There are some credit cards where if you spend more than Rs. 5000 with it,  might allow you to pay the amount in three EMIs without any interest. However, this would still come with a processing fee of 3-5%.  Unfortunately this is the closest you could get to a true zero per cent scheme!

courtesy : Times of India

All about bank savings a/c interest rates!

Every individual has a Savings Bank account, but pays little attention to the interest earned on the balance in this account. Some people may not even know that the balance they maintain in their savings bank accounts earn an interest. In the past, before RBI had deregulated the savings bank interest rate regime, all banks were offering the same interest rate, which was 4% per annum. When RBI brought about changes in 2011, banks became free to decide the interest rate they wanted to pay on their savings bank accounts, depending on their liquidity and profitability preferences.

How is savings bank interest rates calculated?

Previously, the interest rate of 4% per annum was applied against the lowest balance available in the account between the 10^th and the final day of the month. This was seen as a very unfriendly method of calculation, as the depositor did not receive full benefits of the amount he maintains in his account. From April 2010 onwards, this changed and the savings bank interest is now calculated based on the daily balance method. This means that you will earn interest based on the closing balance you maintain every day, giving you the maximum benefits. For example, let’s say that your bank pays you an interest rate of 5% on your savings bank account. You have the following transactions during the month:

1^st of the month: Balance in the account is Rs. 3 lakhs

21^st of the month: Withdraw Rs. 1 lakh à Balance in the account is Rs. 2 lakhs

25^th of the month: Deposit Rs. 2 lakhs à Balance in the account is Rs. 4 lakhs

31^st of the month: Balance in the account is Rs. 4 lakhs

Your savings bank interest amount will be calculated at 5% on Rs. 3 lakhs for 20 days, Rs. 2 lakhs for 4 days, and Rs. 4 lakhs for 7 days, instead of the earlier method wherein the interest is calculated on the minimum balance of Rs. 2 lakhs.  Thus, you stand to earn more in the present times than what you might have earned in the past.

What has the de-regulated Savings Bank interest rate regime resulted in?De-regulating savings bank interest rates have definitely helped the customer to earn more interest, as competition for low cost savings bank accounts has led some banks to increase the interest rate offered. However, on the ground level, it is seen that not many banks have actually increased their rates beyond the 4% mark. For deposits below Rs. 1 lakh, IndusInd Bank, Kotak Mahindra Bank and Yes Bank offer higher rates at 5.5%, 5.5% and 6% per annum respectively, while for deposits above Rs. 1 lakh, these banks offer 6%, 6% and 7% per annum respectively in that order. However, majority of the banks, including the big banks like SBI, ICICI Bank and HDFC Bank have retained the savings bank rates at 4% per annum. This shows that savings bank interest rate may not be the sole determining factor of which bank you must hold your savings account with; other reasons like quality of service, familiarity with the bank, user-friendly interfaces etc. also play an important role. In the case of HDFC Bank, their low cost deposits as a proportion to total deposits are very high at 45%, giving it less incentive to offer high interest rates.

The increase in rates on Savings Bank accounts also results in higher interest rates on short term deposits offered by the banks. An increase in deposit rates will lead to a contraction in the net interest margins of the banks. As a result, to maintain margins, such banks will increase their lending rates, leading to costlier loans. Although an increase in lending rates is a factor of many conditions, increase in the interest of low cost deposits is an important factor.

The high rates on Savings Bank accounts quoted by a few banks can go down if the rates on fixed deposits also go down and if the general interest rate scenario is soft. As the threat of inflation continues and RBI has still not shown signs of reducing rates, the current scenario is expected to continue for some time.

Taxation of Savings Bank Interest rates:

Unlike interest on fixed deposits, interest earned on savings bank accounts is not subject to Tax Deduction at Source. However, this does not mean the interest earned on Savings accounts is completely tax free. It is exempt up to Rs. 10,000 in a year, and if the interest you earn from Savings accounts crosses this threshold, it becomes subject to tax.

Things to look out for before you shift your Savings Bank accounts based on the interest rate:

As mentioned earlier, only a few banks offer high interest rates. However, you need to consider a few factors before you jump to shift your account. Ascertain the minimum balance to be maintained and the account closing fees. Sometimes minimum balance can be waived off if a fixed deposit is opened with the bank. Also evaluate the service charges and various ancillary fees. After all, your Savings account should offer you a host of benefits, rather than simply earning you interest.

courtesy : http://www.bankbazaar.com