ONE OF THE BEST FIXED DEPOSIT FOR RETIRED PERSONNEL

Lt Col Mankoo is a retired officer. He gives me a feedback on my writings. Last time when he met me he asked me some advise on Fixed Deposits of banks. This one is for him and all retired personnel who want a fixed income with adequate safety.

At present NO interest income (from term deposits / fixed deposits) is exempted from tax  (a few years back interest  income upto Rs.12,000/- per year was exempted  under Section 80L of the Income Tax Act).  With effect from FY 2012-13, interest income upto Rs10,000/- earned on saving bank deposits  only is exempted from income tax.   As per present income tax guidelines, banks are required to deduct tax at source (TDS) on interest of Fixed deposits if  the total interest earned on all your fixed deposits in a bank is more  than Rs.10,000 in a financial year. (as per these guidelines even if a fixed deposit is in the name of a minor  TDS is deducted).  However, the depositors can claim the credit for such TDS in their income tax returns.

Therefore, for a tax payer in the highest tax bracket who invests Rs 10 Lac in a bank FD paying  8.5%  interest for a 10 year deposit, the returns would be  Rs 85,000 less Income Tax deduction (10.3%). So the net amount bank will give you is Rs 76245/- resulting in an effective interest rate of 7.62%. And this amount will remain the same for the period of your FD. At the end of ten years your returns would be (Rs Rs76245x10 + 10,00,000)= Rs17,62,450/-

If  he were to invest the same Rs 10 Lac in a good business paying a handsome dividend what is he likely to get? Let me examine one company which has a good dividend track record.

HINDUJA GLOBAL SOLUTION (CMP at the time of writing Rs 320)  Hinduja Global Solutions Ltd (HGSL) is one of the leading global BPOs is among the largest, listed pure play BPOs in the Domestic Market. Growth at HGSL has been robust and the company has been able to multiply the size and scale of its operations within a few years. The company provides Information Technology Enabled Services in India and internationally. They offer professional IT Staffing, Claims Processing, Call Center, Software Development, and Consulting Services .

The Promoters ie the Hinduja Family controls 68.2% shares. Institutions and Corporates have another 24% of shares and the public holds only about 7.9% shares.  As a result the daily average volumes and liquidity in the shares are less. The company has an equity of 20.59 cr and at the current price of Rs 320, the company is selling for Rs 641 cr. It is a debt free (no long term debt) company and has cash worth Rs 300 cr. The market value of the business is thus Rs 341 cr. The company has been a steady dividend payer for the last ten years. Currently it is paying Rs 20 per share as dividend. It translates into a tax free yield of 6.25% per annum.

So on a Rs 10 Lac investment Mr Mankoo  would be able to buy 3125 shares and he would get Rs 62,500/- as a tax free dividend credited into his bank account. Plus, the appreciation in the stock price. Assuming that HGS does not increase the dividend payout for the next ten years and the business grows at the rate it has grown in the last ten years, the stock price adjusted for splits and bonuses should be approx Rs 700/-  at some point in the next ten years. So, at the end of ten years his returns in this case  would be (Rs 62500×10 + 3125 xRs700)= Rs 28,12,500/-.

It makes immense sense to invest in such good businesses and reap the best of both the worlds. The only thing which one needs to be careful about is to pick inherently good companies with a very good track record. Another company which qualifies on the same criteria is ILF&S Investment Managers.