| Thursday, 08 September 2022 |
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Good morning [%first_name |Dear Reader%],
A few days ago, a friend expressed dismay at the low returns on his bank fixed deposits (FDs). But haven’t the rates risen after the RBI’s repo rate hikes over the past few months, I asked. “They have risen, all right,” he admitted, “but even at a 7% interest rate, with 30% tax, my post-tax return is less than 5%. That’s still less than inflation.”
And to boot, these FDs are cumulative, he protested. “I am paying tax on interest income that I haven’t even received in my account. Not fair.”
My friend has a point. In a cumulative deposit, the interest accumulates each year and is paid out only at the end of the deposit tenure, instead of being credited each year. So, the grouse—on shelling out tax now on money that he will see only in the future—seems valid.
But the taxman, contrary to perception, is also kind. Sure, they would prefer that we pay tax on our interest income every year, whether we receive it or not.
