Other Fixed Income Securities


There are a number of fixed income securities to make investments like FD, Form 15G/H, RD, PPF, NSC, POMIS, and FMP etc. This tutorial explains all these instruments in detail.

Bank Fixed Deposit (FD)

A bank FD is a saving plan given by bank to its customers/depositors who wish to invest in safest and most flexible form of instrument. What do I mean by safest and most flexible?
Let us understand this very carefully

Features

  • Safest

    Money deposited in bank is insured by Deposit Insurance and Credit Guarantee Corporation (DICGC) a very old subsidiary of RBI. Each customer/ depositor is insured up to 1 Lakh rupee which includes both principal and interest. Now you must be wondering what if we have invested more than 1 lakh and bank defaults. In that case lender of last resort that is RBI (Reserve Bank of India), the central bank of the country and the governing body for all the banks will come and rescue you through recapitalization bonds with government. There is very less probability that you will lose your money after that and that is why Bank FD is the safest way to invest money but not completely safe.

  • Flexible

    It is the most flexible instrument because you can invest and withdraw anytime you want, you just have to pay a small penalty if you close prematurely and that is it. You can walk out with all the money. You cannot get this kind of freedom in any other instrument. Amount invested and Maturity is another reason why I call it flexible. You can invest in Bank FD with as low as 1000 Rs and for as short time period as 7 days maximum 10 years. You read it right if I am not wrong, only mutual funds provide this kind of freedom not any other instrument.

  • Taxable

    Interest income from bank FD is taxable up to highest tax bracket and we get very limited tax saving option in this instrument.

  • Rate of Interest

    All the banks have similar interest rates; difference if any would not be more than ± 10 points. Important thing here is that banks are not the only one to decide the rate; RBI plays a major role in deciding the rate based on the supply of money in the economy.

  • Collateral

    Bank FD can be used as collateral to take loan. Even better option, you can use your bank FD to take loan from the same bank and the rate of interest charged will be just 1% above the interest rate received on bank FD. So if you are receiving 7% on your FD you will have to pay 8% on your loan.

  • Low Return

    Compared to equity or debt, FD give very less return but as explained earlier, risk is also very less and risk and return go hand in hand. Senior Citizens enjoy 0.5% extra return in Bank FD.

Form 15G/H

This is a very interesting form. If our interest income on bank FD is more than 10 thousand, bank will deduct 10% of that amount and give it to the income tax department. Now if we fall in any of the tax bracket of Income tax then we can pay the balance amount as tax. But if we do not fall in any tax bracket i.e. our income is less than 2.5 Lakh then we are not liable to pay tax and the amount deduction from our interest income should not happen. To inform the bank that you do not fall in any tax slab, you have to fill form 15G (15H in case of senior citizen). Please note, you have to fill this form twice in an accounting year.

  • When you make new (or renew your old) FD and
  • Between beginning of the accounting year (1st April) and before the maturity of the FD.

Recurring Deposits

Recurring Deposit or better known as RD is another interesting instrument through which we can invest money. It is similar to FD in the sense that it is very safe, flexible and we can any time invest or withdraw our money. The only difference is that while in FD we invest a lump sum amount and the interest rate is fixed throughout the tenure, in RD we invest equal amount at regular intervals and interest rate changes every year based on government norms.

Features

Most of the features are similar; we will only discuss the different ones

  • Minimum Amount and Duration

    We can invest in RD from a very small amount of 10 rupee and for small time period of 6 months.

  • Premature withdrawal of RD

    Most of the banks allow premature withdrawal of RD. They deduct 1% or 2% of interest from the actual interest amount as penalty. If we withdraw before the minimum lock in period (which is generally 3 months), we do don’t get any interest income.

    Other than this all features are similar to FD, interest is taxable, we can get loan on our deposit. Some minor changes will be there because every bank has different policy.

  • Public Provident Fund (PPF)

    PPF is very interesting scheme started by government of India to promote saving among salaried people. In this instrument we have to deposit minimum 500 every year till 15 years. Why it is interesting? Because not only it promotes saving but also saves tax. How?

    Let’s read its features carefully.

    • Investment

      Minimum 500 and maximum 1,50,000 p.a. till 15 years but the good thing is we can deposit this amount any time during the accounting year and the amount need not be the same. Minimum one deposit should be there and Maximum 12 deposits in a year. Total of all the deposit should not be more than 1,50,000.

    • Lock in Period

      Before 7 years you cannot withdraw your amount, after 7 years partial withdrawal and after 15 years full withdrawal is allowed. We can renew the period of PPF for blocks of every 5 years after completion of initial 15 years

    • Tax Benefits

      Biggest advantage which PPF gives is Tax exemption. PPF is nontaxable under section 80C of income tax act, the interest income is also not taxable and the final corpus of money which you will receive is also non-taxable. So in short we don’t have to pay any tax if we invest in PPF.

    • Interest Rate

      Interest rates are revised by the government every quarter. Current interest rate is 7.8%

National Saving Certificate (NSC)

National saving certificate is a small instrument provided by post office to promote saving among individuals. This means Hindu undivided family and Trusts cannot invest in NSC; also NRI cannot invest in this instrument. NSC helps in both tax saving and investment purpose and has a maximum lock in period of 10 years. Let’s understand it features.

  • Invest

    NSC is available in denominations of 100, 500, 1000, 5000 and 10000. These are face value and upon maturity we will get both principal and interest amount. NSC are issued by Department of Post, Government of India, through the post offices located across the country, we can go there and purchase the same.

  • Interest Rate

    There are two types of NSCs - NSC VIII and NSC IX, government has stopped the issue of NSC IX from December 2015 and only issues NSC VIII. The current interest rate is 8.1% for NSC VIII.

  • Risk

    Because this instrument is backed by government of India hence low risk.

  • Tax Saving

    There is no upper limit on investment in NSC put we can claim only 1,50,000 (both principal and interest) under section 80C. Also we get cumulative interest at the end of the tenure (5 or 10 years) but we have to show interest income every year and because interest is reinvested again we have to claim the same again under Section 80C.

  • Liquidity and Transferability

    We can use our NSC as collateral to get loans from bank. Premature withdrawal is allowed. If we withdraw before 1 year, we will get only our principal amount back. Between 1 to 3 years, we will get our principal and interest money back. Interest money in this case would be based on Simple interest calculation and not compound interest. We can transfer NSC from one person to another before the maturity of the same.

Post Office Monthly Income Scheme (POMIS)

Compared to previous instruments, POMIS is quite unique. In POMIS we invest a certain amount with post office and earn a fixed interest every month. It is basically an instrument for capital protection. Let us understand it carefully.
  • Investment

    We can invest up to 4,50,000 individually and 9,00,000 jointly. The maturity of this instrument is set as 5 years. Minors between the age group 10 to 18 can also invest in this instrument. Upper cap for this is 3,00,000. NRIs cannot invest in this instrument. A person can open multiple accounts under his name in this instrument but the total of funds cannot be above 4.5 lakhs.

  • Risk

    Because this instrument is backed by government of India hence low risk.

  • Taxability

    This instrument does not fall under section 80C so we have to pay tax on the interest earned on this.

  • Withdrawal

    If we withdraw before 1 year we do not get any benefit. If we withdraw between 1 to 3 years, whole deposit is refunded after 2% penalty. If we withdraw between 3 to 5 years, whole deposit is withdrawn with 1% penalty.

Fixed Maturity Plans (FMP)

Often called as FD of mutual funds, FMP is one of the few instruments which deal with debt issued by corporate. FMP are closed ended debt funds. Maturity of this instrument ranges from 1 month to 5 years. We can make investment in these only when the schemes are open. Mutual fund house in turn invest these fund with debt issued by corporate that have a maturity which is similar to FMP.

FMP do not invest in equities, they invest in debt instrument like commercial paper, certificate of deposit (FD) or highly rated (AAA+ or AAA) debt funds so risk of default is very less.

  • Taxation

    In FMP taxation depends on investment option. In growth option, returns are treated as capital gains. If the return is within 1 year it is short term and would be added to the income of the investor and would be taxed as per his slab rate. In case of long term we take lower of capital gain with indexation (20% + surcharges) and without indexation (10% +surcharges). After tax, returns are comparatively high.

  • Liquidity

    In terms of liquidity, FMP are bit rigid because they invest in close ended schemes, only way to exit is to sell your units in open market which is not possible always because you need buyer for the same. Hence practically speaking they are illiquid. So people who want higher returns and do not have liquidity problems can invest in this instrument.


Join 40,000+ investors and subscribe to our best stuff on investing and stock analysis.

icon for instant payout
Easy and Instant Payouts

Initiate payout through Back office by 8.30am and within 6.30pm funds will be credited to client's bank account.

icon for instant payout
Free Demat Account

Open a Demat account, easy & convenient, no stamp duty, reduced paper work and experience fast, secure and seamless trading

icon for instant payout
Lowest Brokerage Charges

ATS offers lowest brokerage charges with no hidden cost.

icon for instant payout
Call N Trade Facility

Our Service Desk is operational on all trading days between 9:00am to 11:30pm.

icon for instant payout
Premium Recommendations

The package from ATS is designed for those, who wants to earn higher returns when compared to regular intraday packages.

×
Let's Chat
close