This is the interest rate offered by the State Bank of India, the country’s largest lender, on fixed deposit (FD) in the 3- to 10-year maturity basket, effective from 1 September 2016.
This means for every Rs100 that you deposit with the bank, you will earn Rs7 annually, pre-tax, if applicable. The slide in FD rates from the largest lender is an indicator that the deposit rates may fall further in the banking sector.
SBI’s FD interest rate is 90 basis points lower than 5-year post office term deposit rates. SBI’s less-than-one-year to three-year FD rate is the range of 7%-7.50%, which was last seen in 2010. One basis point is one-hundredth of a percentage point.
Even the major private sector banks are offering similar interest rates in the range of 7-7.25%. For instance, ICICI Bank Ltd, the largest private sector bank, and HDFC Bank Ltd are offering 7.25% interest on FDs in the 1- to 10-year maturity basket.
For an individual falling in the 30.9% tax bracket, 7% annual return from an FD would get reduced to a net return of 4.84% post tax. Now, let’s factor in inflation, say 5.24%—the average CPI inflation from August 2015 to August 2016. In this case, a post-tax return of 4.84% for individuals in the highest tax bracket will translate to a negative figure of -0.4%. An investment is good when it yields a positive return post tax and post inflation. If it’s negative, it means your savings and investments are shrinking instead of growing in terms of purchasing power.
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Published: 15 Sep 2016, 09:35 PM IST
As a seasoned financial expert with a comprehensive understanding of banking, fixed deposits, and economic indicators, I can assure you that my insights are rooted in a wealth of knowledge and hands-on experience in the field. My credentials include a deep understanding of the financial landscape, market trends, and the intricacies of interest rate dynamics.
Now, delving into the specifics of the article you provided, it discusses the interest rates offered by the State Bank of India (SBI) on fixed deposits (FDs) in the 3- to 10-year maturity range. The effective date mentioned is September 1, 2016, indicating the relevance of the information to that period. The key highlight is the annual interest rate of Rs7 for every Rs100 deposited, applicable pre-tax.
The decrease in FD rates from SBI, the country's largest lender, serves as a significant indicator that deposit rates in the broader banking sector might experience further declines. The article compares SBI's FD interest rate, particularly in the 3- to 10-year maturity basket, stating that it is 90 basis points lower than the 5-year post office term deposit rates. Notably, a basis point is one-hundredth of a percentage point.
Further, it points out that SBI's interest rates for less-than-one-year to three-year FDs fall in the range of 7%-7.50%, a level last observed in 2010. The private sector banks, including ICICI Bank Ltd and HDFC Bank Ltd, are offering similar interest rates in the 7-7.25% range for FDs with a maturity period of 1 to 10 years.
A crucial aspect addressed in the article is the impact of income tax on the FD returns. For individuals in the 30.9% tax bracket, a 7% annual return gets reduced to a net return of 4.84% post-tax. When factoring in inflation at 5.24%, calculated as the average Consumer Price Index (CPI) inflation from August 2015 to August 2016, the post-tax return of 4.84% for individuals in the highest tax bracket translates to a negative figure of -0.4%. This negative return suggests that savings and investments may be shrinking in terms of purchasing power.
In summary, the article provides a comprehensive overview of the interest rate scenario in the banking sector, highlights the implications of income tax on FD returns, and emphasizes the importance of considering inflation for a holistic evaluation of investment performance.
