Many people have an inclination towards bank Fixed Deposit as an investment option. Very few people know that investment in Debt Fund can be more tax efficient than bank Fixed Deposit. Interest earned on bank FD is added to your yearly income and taxed as per applicable tax slabs. However if you stay invested in debt fund for more than one year, it is considered as long term capital gain. In current scenario, it is taxed at 10.3% without indexation. You can even take the benefit of indexation to lower your tax.
Let’s look at the following comparison
If a person has invested Rs 1,00,000 for 5 years in Bank FD vs Debt fund
|Fixed Deposit||Debt Fund|
|Interest Rate (%)||9||9|
|Interest Earned in 5 years||56,568.000||56,568.000|
|Income Tax Rate (%) – (depends on your tax slabs)||30.9||10.3|
|Total Taxes Paid||17,479.512||5,826.504|
|Post Tax Returns||39,088.488||50,741.496|
|Interest Earned Post Tax Return (%)||6.6||8.2|
In addition to better return, you can get advantage of postponing your tax liabilities i.e. in fixed deposit, you need to pay tax every year on interest earned however in debt fund you will have to pay tax only at the time of withdrawal.
For short term FD, interest rates are very low, sometimes not even beating the inflation however, if someone invests in short term or ultra short term debt fund, he can expect better returns without compromising the liquidity.