Post Office Monthly Income Scheme ( MIS ) is very popular among the masses, especially those retired.
Its features are:
1. Monthly income at the rate of 8% per annum + 5% bonus on maturity (which works out to be an effective yield of 8.9% )
2. Income is taxable, but no TDS.
Some of its disadvantages are:
1. Interest rates are not in-line with the market rates. As recently as October-November 2008 when banks were offering more than 10% on fixed deposits, the MIS interest rate was still 8%
2. There is a ceiling on maximum investment.It is rupees 3 lakhs for a single account.
3. Cumbersome visits to the post office and sometimes you have to face long queues ( although this can be resolved by following one of my previous post )
4. Restrictions on pre-mature withdrawal. You cannnot close an MIS account before 1 year.
All the above disadvantages can be overcome by employing the Quarterly Interest option offered by Bank FDs. Usually when customers open a fixed deposit ( FD ) with a bank they go for the cumulative option where interest keeps on accumulating and is paid out only on maturity. Instead they can go for a quarterly interest option FD where the interest is calculated and paid out quarterly. Most banks ( public & private ) offer this option of quarterly interest payout, which can also be credited to your bank account.
With a litte bit of self-discipline you can use this Quarterly interest option as a replacement for MIS. Some banks also offer the monthly interest payout FDs but the interest rate on such FDs is usually lower ( by around 0.5% ).
Let's see how we have overcome the above disadvantages of PO MIS by replacing them with Bank FDs:
1. The interest rates are in line with the market rates. If the interest rates in Banks are higher than POMIS, it makes sense to go for Bank FDs.
2. No upper limit on investment.
3. Interest can be credited to your bank account directly.
4. No restrictions on pre-mature withdrawal. You can break an FD whenever you wish to.
Tax-treatment is same as MIS, except for the fact that TDS is applicable.
Thursday, January 15, 2009
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Hello CA,
ReplyDeleteWhat does it mean when you say 'Income is taxable, but no TDS' for MIS. Isn't tax on income same as TDS?!? Thanks in advance.
Hi Kinnar,
ReplyDeleteTDS means Tax deduction at source which implies a person/organisation paying you money ( as interest or salary ) deducts a certain % of the amount as tax and issues you a certificate stating the amount of tax deducted during the financial year. When I say "Income is taxable but no TDS" this means that irrespective of the amount of interest earned in the POMIS deposit, the post office does not deduct any tax on it. It is your responsibility to pay tax on this interest earned ( since no tax is deducted at source ). This is unlike bank deposits where Banks are required to deduct TDS if the interest earned in a financial year exceeds Rs. 5000 ( as per current tax laws ).