In contemporary times, several avenues like property, mutual funds, savings bank accounts, and term deposits are available to investors. One of the traditional ways is fixed deposits, which yield a modest interest income. Recently, gold purchase schemes have garnered widespread acceptance. Investing in these schemes requires an understanding of their nuances and thorough analysis.
Fixed Deposit
Fixed Deposits (FD) involve depositing a lumpsum principal for a fixed term offering modest interest income. These deposits can be with banks, financial institutions, and corporations offering varying interest rates and tenuresThey are low-risk and reliable investments, providing an assured sum along with interest upon maturity, particularly for senior citizens, since they receive higher interest rates, aiding them in meeting their miscellaneous expenses.
Returns
FD returns depend on the tenure of the deposit. Prevailing interest rates ranging from 5% to 7% are higher than the interest rates offered on a savings account, which stands at 4%. The interest payouts are available on monthly, annual and other bases.
Taxation
Tax laws govern taxation, deduction and reporting related to FDs. FDs with a term exceeding 5 years with a scheduled bank and notified by the Central Government enjoy a tax deduction u/s 80C of the Income-tax Act, 1961 (‘the Act’) up to Rs 1,50,000 i.e. an initial investment. FD interest is taxable, with individuals being liable to pay taxes under the heading ‘Income from Other Sources’ on an accrual basis.
However, interest earned on FDs in Non-Resident External (NRE) or Foreign Currency Non-Resident (FCNR) accounts is exempt from taxation. Furthermore, under the old tax regime, interest from FDs up to Rs 50,000 p.a. is exempt for senior citizens u/s 80TTB of the Act.
Banks or financial institutions offering FD interest are mandated to deduct TDS @ 10% on interest exceeding Rs 40,000 (Rs 50,000 for senior citizens). Investment in FDs is reflected in an individual’s Annual Information Statement (AIS), accessible on the income-tax portal of the individual since banks and financial institutions need to report deposits of more than Rs 10 lakh by an individual.
Gold Purchase Scheme
The Gold Purchase Scheme (GPS) allows future gold purchases through monthly deposits. GPS is currently not regulated by any institution; hence, the schemes run by popular jewellery houses differ in the returns at maturity.
Returns
The gold rate could be fixed at the time of initial investment; hence, any fluctuation in rate could be managed at the time of purchase on maturity. For example, if the gold rate at the beginning of GPS is Rs 5,500 per gram and at maturity is Rs 6,000 per gram, then the investor could purchase at the initial rate of Rs 5,500. This allows the investor to possess more gold at a fixed rate.
The investor enjoys additional benefits as the making charges on the jewellery are waived off or discounted, as is one month’s instalment, i.e., it is borne by the jewellery house.
Taxation
Since GPS is essentially an asset-purchase investment and no cash payout is received, it is not taxable. While there is a requirement to report jewellery in Schedule AL (if total income is more than INR 50lakh), there is no reporting requirement by an individual for GPS investment.
Does GPS glitter more than FD?
India, being one of the largest consumers of gold, has a widespread trend of purchasing gold for special occasions. Despite the increasing gold rates, the demand for gold continues to rise.
Individuals must carefully compare FDsand GPS, and evaluate the risk, return, and liquidity aspects before making investment decisions. Understanding the nuances of each option is essential for maximising returns and achieving financial goals.
The writer is Partner, Tax & Regulatory Services, BDO India
Disclaimer – The views, thoughts and opinions expressed in the article are solely the author’s and are not representative of the author’s employer/organisation.