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Friday, 16 March 2007

Bank Interest Rates: Domestic, NRE & Taxes

Bank Domestic Interest rates are rising faster than NRE rates

About 20 years ago, banks were offering up to 17% (i.e. up to 2% more than Domestic ).
I remember those days one could double up his money in just 5 years.
The rates were down but steady for about 14 years at around 11% and before July 17 2003, banks were still offering around 7.5%. But from August (2003), rates were down to 3.8% and again, by the end of the same years i.e.eff. from 1st November 2003, no known bank would offer more than 1.75% for a 12 months term NRE deposits.

Over the past 4 and a half years, we have seen lot of ups & down in the NRE interest rates ranging from 1.75 to 6.35% which is now (March 2007) is 5.7%. (see tables along side as on 15.03.2007)

Again, Domestic rates those days were always lower than NRE rates. 1 or 2% offered extra to NRE deposits and this was solely to attract foreign investment or foreign exchange. Domestic rates too seen fluctuation over the last few years say from 5 to 9.75%.

Current trend looks like this..
(March 15, 2007) (abv table as on March 15.2007)
Domestic 8.25% to 9.75%
NRE 5.4% to 5.75%

NRE interest pegged to 100 basis points above LIBOR
So, when UK Bank rates go up, Indian Bank rates will go up too.

Senior citizen (60+) 8.5% to 10.05%

As can be seen from above that Domestic rates are up to 4% higher than NRE, I guess it is wise to convert the NRE deposit into Domestic to fetch higher rate of income/interest.

See various tables.

Q. What about the taxes ?
Banks are required to deduct taxes at source (TDS) on all Domestic Deposits.
I think, if your income or interest earned from all deposits with the same bank exceeds Rs.5000 then you are liable to pay tax on the excess amount and then there is E.C. 2% tax on tax which is very negligible.

Q. What about NRE tax ?
Good question. I think (but not very clear) that all NRE deposits subject to pay tax from the current financial year i.e. 2006-2007.

Q. Last April 2006, we have invested in a bank (Domestic) fixed deposit a/c for 3 years fetching interest @ 7%, are we liable to pay tax? How much?
Salu Rs. 70,0000 (70K)
Lino Rs. 1,50,000 (150K)
Eddie Rs. 2,25,000 (225k)

A. Tax for the financial year 2006-2007
SALU: No. Assuming this is the only fixed deposit you have in the bank.
As you will receive interest less than Rs.5000 for the whole year, you are not liable to pay tax. Formula: Taxable Income (TI)=Total interest received (TIR) minus Rs.5000 . Tax is 10% of TI (2% Educational Cess on tax may also be levied) .
LINO: Yes, you will pay around Rs.561 every year on the interest you rcvd Rs.10,500
EDDIE: Yes, you will pay around Rs.1097 on the interest you received Rs.15,750

Simple Interest (SI)= Principal amount (PA) x7/100

Tax (T) = (SI-5000)x10/100
Educational Cess = T x2/100

e.g. SALU (abv)
SI = 1,50,000 x 7/100 = Rs.10,5000

Tax = (10,500-5000) x 10/100 = Rs.550

E.Cess = 550 x 2/100 = Rs. 11

i.e Total Tax or TDS = Rs.561

Note: Interest Rcvd likely to be more (compounded Interest) so also the tax payable to that extent.

Advice to SALU/EDDIE/LINO break and re-invest your deposits to fetch 2% more interest. Do this in this April.

Q, Miguel has 50K each (March 2007) in fixed deposits at 4 different banks viz. SBI, BOI, BOG & Saraswat each fetching 9% p.a, is he liable to pay tax ?
A. In the eyes of Income Tax Law, Yes, for the year 2007-2008. Income from all sources including bank or banks is taxable. But in this case, our Minguel is likely to get away as his individual bank will not deduct TDS as his income is less than Rs.5000.
But, had he maintained all his 4 deposits in any one bank only, then the bank would have deducted (TDS) Rs.1,326 every year.

Q. In order to buy her a new flat in Vasco, Jen deposited (April 2004) Rs. 6 lakhs (600K) @ 5.5% pa for 5 years. What about her ?
Jen, an advice, break your deposit and re-invest at current rates and get at least Rs. 21,000 extra pa.
TAX Rs. 2,856 (on interest rcvd 33,000 @5.5%
TAX Rs. 5,000 (on interest rcvd 54,000 @ 9%)

Q. Falcon has NRE deposits Rs.3,50K May 15, 2006 fetching interest @4.5%, Now that the currents rates are 5.75%, is it OK for him to break and re-invest ?
Yes. But break/re-invest soon after May 15, 2007. If done before that, he will lose all the interest earned for that period. There is a penalty for closing/encashment/re-investment during the first one year.

Note: Others who are in similar situation and who may have kept their deposit receipts with the bank (safe Custody), may instruct their bank to break and re-invest. A simple email should also do (if you wrote/email to them at least once before)

Q. Domnic has about 3 lakhs to invest but he does not wish to pay a tax on his hard earned money, what advise for him ?
Copy Minguel above (Keep this between you and me only).
Or keep/split it under different names like his wife, children etc

Q. Everytime, I keep money at home or send through friends, my dad finishes it quickly mainly on drinking and gambling Matka etc and then ask for more. Any advise/solution to provide him a regular monthly income ?
When you go to Goa next, keep a large/lump some amount in a bank say Rs.1 lakh preferably in the name of your father (this is to fetch up to 1% more interest Sr. citizens see table abv) and instruct the bank to pay interest monthly crediting his SB a/c. This way, he can take up to Rs.833p.m.

IMP. Because the money is yours, make sure you mention your name as nominee or else all your other brothers including your married sisters will have share in it.
Alternately, all of you (bros & Sis) can jointly contribute towards the fund in which case your parents can even get larger monthly amount. Just forward this email to them and they will understand the reason why you forwarded to them.

Q. If the NRE interest is taxed from this year, roughly how much I would pay on my Rs.3 lakhs deposit fethching 5.5% ineterest ?

Well, go through these tables and you will get some ideas.

- Please do not take this as professional services.
- This is just to give you some ideas as to what it might look like..
- It is assumed that Domestic Tax rate is 10% whereas NRE tax rate is 20% with 2% Educational Cess.
- There might be differet rates of taxes for different income bands.
-You may forward this to your banks for further clarifications.- You may also write back to me with any further queries or with some answers which you may have received from your banks etc. It will help me to update this info in the interest of all.

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