Thursday's business papers all carried a State Bank of India Tax Savings Deposit Scheme advertisement on their front pages.
The ad claims it is a five-year fixed deposit offering jaw-dropping high double-digit yields. But hold, before you fall for this big number, take a calculator and do the math yourself. You will be amazed to find out how deceptive the ad is.
To know more, read on.
Product details: According to the advertisement, it's a five-year tax savings FD, which means it comes with a lock-in period of five years. You can invest a maximum of Rs 1 lakh in a financial year and you get a tax deduction of up to Rs 1 lakh, under Section 80C of the Indian Income Tax Act.
What the advertisement says: "Why choose just one," cries the advertisement, when you get double benefits, both tax savings and high returns. It said that the product offers 17.39 percent per annum for senior citizens and 16.64 percent per annum for others in the blurb of the advertizement.
Who wouldn't fall for these? Thankfully, the bank has given a table, but all may not be able to analyse it clearly to work out the figures.
As per the advertisement, if you invest Rs 10,000 and you fall in the highest tax bracket (30 percent), you immediately save Rs 3,090. Now, SBI further said, since you save Rs 3,090, your effective investment amount is Rs 6,910. Unlike the blurb, the table also mentions a rate of interest of 8.50 percent, and the amount on maturity is Rs 15,228.
In other words, what the bank wants you to believe is that you are investing Rs 6,910 and getting back Rs 15,228. So, the total pre-tax benefit is Rs 8,318 (15,228-6,910).
Now they further say that effective annual yield is 16.64 percent.
How did they come to this figure? Let's see.
They have simply taken Rs 8,318 (their supposed pre-tax benefit amount) and divided it by five years, which is Rs 1,663.6, and they have then calculated the percent (1,663.6/100) which is 16.63 percent.
The truth is that you are investing Rs 10,000 (and not Rs 6910) for five years, with quarterly compounding and at 8.50 percent, hence you get Rs 15,228 on maturity. So, the rate of return you actually earn is 8.50 percent, and that's the return which is an important number. Not the effective annual yield of Rs 16.64 percent.
Of course, they have given an example for 30 percent tax bracket, for twenty percent and ten percent tax bracket the number would play out differently. What's important to note is that even though they say it's a double benefit, it not a double benefit if you take the 16.64 percent figure, since the tax benefit is included in it.
Other banks are offering similar rates for similar products, and some even 9 percent. So, if you fall for the 16.64 percent figure, you might just put your money in an instrument that offers only 8.50 percent, when others offer a good 50 basis points more.
So, don't get deceived by the 16.64 percent number. Know what you are getting into.
State-owned SBI is the largest bank in the country and leads others on many counts. But it is not only SBI that has come out with such ads. An older Uco Bank advertisement doesn't bother to give the rate of return and simply states an annual yield. If state-run banks start confusing customers like this, it is not a good sign. If a simple instrument like a tax-saving FD is sold in such a manner and confusing the daylights out of the aam aadmi, why blame him for just investing in gold?