SBI TAX SAVINGS SCHEME, 2006

SBI TAX SAVINGS SCHEME, 2006, is a special type of fixed deposit, offered by SBI, which lets you claim tax deduction under the Section 80C of the Income Tax Act, 1961. Although, SBITSS can be opened both as a TDR and a STDR, certain restrictions on the deposits held under SBITSS make it distinct from normal fixed deposits. (click here, to know more about TDRs and STDRs.)

Like every tax-saving instrument, the deposits held under SBITSS has a lock-in period before which it can not be encashed. In case of SBITSS, the lock-in period is 5 years. Therefore, the minimum tenure of SBITSS deposit is 5 years. The maximum tenure of SBITSS deposit is similar to the maximum tenure of normal fixed deposits i.e 10 years. In line with the maximum deduction allowed under the section 80C of IT Act, the maximum deposit in SBITSS scheme is limited to Rs. One Lac in a financial year. Another restriction over the SBITSS deposit is that, no loans can be availed against the deposits held under the scheme.

The rate of interest offered under SBITSS is similar to that offered on the normal fixed deposits of similar amount and tenure. Like normal fixed deposits, Senior Citizens (above the age of 60) are offered an additional interest rate of 0.50 %. 

 Although the investments made under the SBITSS help you in lowering your tax burden at the time of investment, the interest accrued/earned on the deposit is taxable in the hands of the depositor. At the current interest rate of 9.75 % and 9.25 %, for Senior Citizens and non-Senior Citizens respectively, the SBITSS is certainly better than all those schemes, e.g NSCs and SCSS, whose returns are taxable. ( The current interest rate offered on NSCs (National Savings Certificate) of duration 5 years and 10 years, are 8.4 % and 8.7 % respectively. The interest rate on SCSS (Senior Citizens Saving Scheme) is 9 %).

However, no such clear cut conclusion is possible if SBITSS is compared with the schemes which provide tax-exempt returns, e.g PPF. The attractiveness of the scheme will depend on the tax bracket of the depositor. The higher the tax bracket, the less attractive will SBITSS be.

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A Term Deposit or a Special Term Deposit?

The SBI, broadly, categorises its term (or fixed) deposits into two product types : Term Deposit (TDR) & Special Term Deposits (STDR). The TDR pays out the interest earned by you at a periodicity (monthly, quarterly, half yearly or yearly) chosen by you at the time of opening of the account. However, in the case of a STDR, the interest earned by you is reinvested instead of getting paid out.

If you don't need a regular income in the form of interest payouts, it makes sense to go for a STDR as it allows you to reap the dividends of compounding. The interest accruing on your deposit with the Bank gets reinvested (or compounded) quarterly, giving you superior returns from the first year itself. Let us take the example of the current interest rate of 9.25 %, offered by SBI for domestic term deposits of period one year and above. While a TDR will yield a return of 9.25 %, a STDR will give you an yield of 9.58 % at the end of the first year itself. And the longer your deposit remains with the Bank, the better the returns. A STDR for 120 months, the maximum period for which SBI accepts term deposits, will give an annual return of 14.95 %. The following table illustrates the annual returns for an investment of Rs. One Lac, at the current interest rate of 9.25 %, if the interest reinvestment option is chosen.

year end	your deposit	Annual return
1	109575.83	9.58
2	120068.64	10.03
3	131566.21	10.52
4	144164.77	11.04
5	157969.75	11.59
6	173096.67	12.18
7	189672.12	12.81
8	207834.81	13.48
9	227736.73	14.19
10	249544.42	14.95

At the cost of repetition, if you can keep without regular stream of interest payout, let your funds experience the magic of compounding.

P.S The author of this post waits all ears for your views and comments. Please let them flow freely.If you have any queries, please share them through comments. The author promises to get back to you at the earliest

SBI Interest Rates On Domestic Term Deposits

The term (or fixed) deposit rates offered by SBI for any amount below Rs. One Crore were last revised on 13/08/2011. The term deposit rates are as below:

Tenors	Current rates w.e.f. 13.08.2011
7 days to 90 days	7.00%
91 days to 179 days	7.25%
180 days	7.00%
181 days to 240 days	7.00%
241 days to less than 1 year	7.75%
1 year to less than 2 years	9.25%*
2 years to less than 3 years	9.25%*
3 years to less than 5 years	9.25%*
5 years and up to 10 years	9.25%*

*The Senior Citizens ( aged 60 years and above) are offered an additional interest rate of 0.50% for tenors of 1 year and above.

However, with effect from 01/03/2012, the interest rates offered for tenors up to 180 days have been raised considerably for amounts ranging between Rs. 15.00 Lacs and One Crore.The updated interest rates for single term deposits of Rs. 15.00 Lacs and above, but less than Rs. One Crore, is as under:

Tenors	Current rates w.e.f. 01.03.2012
7 days to 90 days	9.00%
91 days to 179 days	9.00%
180 days	9.00%
181 days to 240 days	7.00%
241 days to less than 1 year	7.75%
1 year to less than 2 years	9.25%
2 years to less than 3 years	9.25%
3 years to less than 5 years	9.25%
5 years and up to 10 years	9.25%

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