Tax laws for TDS on Fixed Deposit and way to defer tax until end of fiscal year.

Fixed deposit is one of the many alternatives and safe way to earn passive income. You can earn higher interest rate than regular saving account. Interest is also considered a source of income and so governed by tax laws of India.

When do the banks deduct TDS on a fixed deposit?
If the total interest earned on all your fixed deposits in a bank is greater than Rs. 10,000 in a financial year, you are liable for TDS and the banks will deduct the income tax at source. The tax liability for the purpose of TDS is determined at the branch level. Even if a fixed deposit is in the name of a minor it will attract TDS and in this case the credit for TDS can be claimed by a person managing the minor's income. Whenever the bank pays an interest on your fixed deposits, it checks it for TDS eligibility. If it qualifies, the TDS is deducted. TDS is also deducted on interest accrued (but not yet paid) at the end of the financial year viz. 31st March every year.
The rate at which TDS is deducted varies according to the category of account holders.

TDS rates for a fixed deposit held by resident individual and HUF
If the fixed deposit holder is a resident individual and HUF, for a payment of up to 10 lacs, TDS will be deducted at a rate of 10% in addition to it there is an education cess of 3% which takes the total deduction to 10.3%. For a fixed deposit of resident individual or HUF with payments equal to 10 lacs or more the TDS rate is 10%, in addition to it there is a surcharge of 10% and educational cess of 3% this takes the total deduction to 11.3%

How does change in FD portfolio affect on TDS?
Any change or enhancement in fixed deposit portfolio affects the TDS liability. If your changed portfolio earns a interest which falls under limit of income tax laws, you will be liable for TDS on your current FD portfolio. In case the interest on your current portfolio is not sufficient enough to cover the TDS, it will be deducted from the principal amount.

For any TDS deducted by the bank, it will issue a Form 16A which can be used to substantiate the facts, while filing the income tax returns.
Remember, that any exemptions claimed don't help you save tax, since in your final Income Tax Return you would end up paying the tax with possibly interest penalties.

What if I don't have my PAN registred with bank?
effective from 01/04/2010, Bank will deduct 20% of your interest on your FDs. so if you don't have PAN quckly apply for one and register it with bank so you can defer TDS until end of year.

So what you can do so Bank does not deduct TDS? Well divide your FDs in such a way that interest from FDs does not go more than Rs.10000. so distribute amount in 3-4 banks. But still you will have to show interest as part of income in when you file for income tax retun after end of fiscal year. so thsi way you can delay tax on interest from FD but can not exempt from it.

understanding signals from RBI credit policy

Every quarter, newspapers and business channels dedicates a lot of space to credit policies by RBI. There are 3 important ratios (CRR, repo rate, reverse repo rate) which are subject to change by RBI in credit policy meetings. These ratios are important to understand as this directly impacts other rates, like interest rate on homes and personal loans etc.

CRR (Cash reserve ratio):
This is the percentage of cash deposits that banks have to maintain with RBI. An increase in CRR means that banks have to park more money with the central bank. This sucks out the liquidity in the banking system. As a result, banks have lesser money with them to lend. This could lead to higher interest rate if there isn't enough liquidity in the system.

Repurchase or repo rate:
This is the rate of interest at which the RBI lends money to banks. In other words, it is the apex bank's lending rate to other banks. A cut in repo rate is good news for banks, as they can borrow more at low cost.
Since, RBI raises its lending rate for banks, the cost of funds for banks go up. Consequently, they lend at high rates as well.

Reverse repo rate:
This is the rate at which RBI borrows funds from banks, opposite of repo rate. In other words, this is RBI's borrowing rate. An increase in reverse repo rate is positive for banks because they earn higher returns by lending to RBI.
If RBI slashes its borrowing rate, banks lend at a lower rate. Also, deposit rates go down.

The change in policy rate (repo and reverse repo rates) has an indirect impact on consumers because the lending and borrowing rates of RBI impact the banks. But it is also a signal whether lending and borrowing rates will go up.

Statutory liquidity ratio (SLR):
This rate is another determinant of lending rates. Every bank has to keep an assured amount of funds in some form or the other (cash, gold, government bonds, etc) before lending to customers. This measure controls bank's credit expansion and can lead to higher interest rates.
The overall impact or hike or reduction in the CRR, reverse repo and repo, like this time, lead to a rise or fall in the interest rates, depending on the quantum.
For instance, the impact of a rise in all three this time is being interpreted as a moderate measure.

Difference between investment and speculation

People often mistakenly take investment as speculation and speculation as investment. This is a very dangerous mistake. So people who want to invest money in stock market or who are investing should know clear distinction between both.

The father of value investing Ben Graham has given very precise definition of investment in his much popular book “Security Analysis”. This definition helps investors to spot the difference between investment and speculation. It reads, “An investment operation is one which, upon thorough analysis, promises safety of principal and an adequate return. Operations not meeting these requirements are speculative." He says investment should be done based on sound fundamental analysis, investment should promise safety of prinicpal, and it should give adequate return. Now how much is adequate? over the long term, if average retun is more than average of (inflation + Fixed Deposit retun) then it can be considered adequate.

Graham also quoted, “in the short term, the stock market behaves like a voting machine, but in the long term it acts like a weighing machine”. So he is suggesting investor to regard shares as ownership in business and should not concern about short term fluctuation of market. Here I want to give you one more quote which from warren buffet and he argued that this is most important word ever written in investment world, “investment is more intelligent when it is most business-like”.

Book review - Rich Dad Poor Dad

Book review - Rich Dad Poor Dad




This book is a master piece from Robert Kiyosaki. Robert Kiyosaki is a forth generation Japanese American. This book has been written in form of story. And everything he explained in form of conversation that's why it becomes easier to digest the financial concepts. Even laymen who don't have very good understanding of finance can understand writing and message given in this book.
In book, he talked about two dads: one is his own dad and other is his friend's dad. He learned most of practical things and financial knowledge from this rich dad. Rich dad gave training to his son and author both since they were children. his mindset is most affected by rich dad as what rich taught him was very much precious things in life. Authors have introduced the concept of 4-quadrants where they have divided quadrant into 4 section: B (business ), S (self-employed), I (Investor), E(Employee). He strongly recommend us to be in I and B quadrants as these two creates assets which works for you even when you are slepping or on vacation. rich like to stay in these quadrants. In those quadrants people creates the assets and assets create cash flow for them. He tells that the moment you started to think in terms of rich, you are rich. They argue that Rich have both income statement and balance sheet and have good understanding of both. Rich creates the assets means money work for them and they don't work for money i.e. stocks, business, mutual funds etc. Medium class people alos have income statement and balance sheet but they are often confused between assets and liabilities. They creates liabilities and mistakenly identify them as assets like mortgaged home, credit cards, personal loans, car, bike etc. Poor people don't have balance sheet, they have only income statement and they spend all their monthly income on their monthly expenses, mean they neither have assets which works for them and nor liabilities to pay for, they work hard their whole life and live paycheque to paycheque.
I would highly recommend this book to read. this book is very inspiring. this is a great book for people who are in their twenties or thirties or even when they are teenage as there is not age-bar to start investing. people should start investing as soon as possible, it means NOW.

8 Tips to Investing Successfully

Charlie Munger is a co-chairman of berkshire hathway. It is widely known that he influenced buffet's style of investing. He is also very well known for introducing "latticework of mental models" concept in investing, I consider this concept a best gift from Mr Munger. It is very much useful in investing and also equally useful in general life . I will write separate article on "latticework of mental models" in future.

For successful investing you have to be patiance, disciplined investor. As they say, investment is never risky, but it is investor who is risky. Here I have listed total 8 investment tenets from Mr. Munger.

1. Risk: measure it, avoid it if possible, have a margin of safety, and limit downside.
2. Independence: don't follow the herd, the herd will only do average.
3. Preparation: learning, building mental models, and continual improvement.
4. Humility: acknowledge what you don't know, don't be overconfident, stay within your circle of competence, and watch for errors.
5. Analytic rigor: calculate value before looking at price, and be a business analyst and not a securities analyst.
6. Allocation: consider opportunity costs.
7. Patience: Wait for the right opportunities.
8. Decisiveness: great ideas are rare, so bet big when they come along and when you have confidence in them.

Happy Investing.