Many companies, large and small, solicit fixed deposits from the public. Fixed deposits mobilized by manufacturing companies are regulated by the company Law Board and fixed deposits mobilized by finance companies (more precisely non-banking finance companies) are regulated by the Reserve bank of India. The key features of company deposits in India are as follows:
1) For a manufacturing company the term of deposits can be one to three years, whereas for a non-banking finance company it can vary between 25 months to five years.
2) A manufacturing company can mobilize, by way of fixed deposits, an amount equal to 25 percent of its net worth from the public and an additional amount equal to 10 percent of its net worth from its shareholders. A non-banking finance company, however, can mobilize a higher amount.
3) The interest rates on company deposits are higher than those on bank fixed deposits.
4) Company deposits represent unsecured loans.
5) Company deposits have to be necessarily credit rated.
6) Depositors don’t get any tax benefit on company deposits. However, no income tax is deducted if the interest income is up to Rs 5000 in a financial year.
7) Companies offer some incentives like facility for premature withdrawal or free personal accident insurance cover to attract deposits.
Employee Provident Fund Scheme:
A major vehicle of savings for salaried employees, the employee provident fund scheme has the following features;
1) Each employee has a separate provident fund account in which both the employer and the employee are required to contribute a certain minimum amount on a monthly basis.
2) The employee can choose to contribute additional amounts, subject to certain restrictions.
3) While the contribution made by the employer is fully tax exempt (from the point of view if the employee), the contributions made by the employee can be deducted before computing the taxable income under Section 80 C.
4) Provident fund contributions currently earn a compound interest rate of 9.5 per cent per annum that is totally exempt from taxes. The interest, however, is accumulated in the provident fund account and not paid annually to the employee
5) The balance in the provident fund account is fully exempt from wealth tax. Further, it is not subject to attachment under any order or decree of a court.
6) Within a certain limit, the employee is eligible to take a loan against the provident fund balance pertaining to his contributions only.
Public Provident fund schemes:
One of the most attractive investment avenues available in India, the Public Provident Fund (PPF) scheme has the following features:
1) Individuals and HUFs can participate in this scheme. A PPF account may be opened at any branch of the State Bank of India or its subsidiaries or at specified branches of other nationalized banks.
2) Though the period of a PPF account is stated to be 15 years, the number of contributions has to be 16. This is because the 15 year period is calculated from the financial year following the date on which the account is opened. Thus, a PPF account matures on the first day of the 17th year.
3) The subscriber to a PPF account is required to make a minimum deposit of Rs 100 per year. The maximum permissible deposit per year is Rs 70,000.
4) Deposits in a PPF account can be deducted before computing the taxable income under Section 80 C.
5) PPF deposits currently earn a compound interest rate of 8.0 percent per annum, which is totally exempt from taxes. The interest, however, is accumulated in the PPF account and not paid annually to the subscriber
6) The balance in a PPF account is fully exempt from wealth tax. Further, it is not subject to attachment under any order or decree of a court.
7) The subscriber to a PPF account is eligible to take a loan from the third year to the sixth year after opening the PPF account. The amount of loan cannot exceed 25 percent of the balance standing to the credit of the PPF account at the end of the second preceding financial year. The interest payable on such a loan is 1 percent higher than the PPF account interest rate.
8) The subscriber to a PPF account can make one withdrawal every year from the sixth year to the fifteenth year. The amount of withdrawal cannot exceed 50 percent of the balance at the need of the fourth preceding year or the year immediately preceding the year of withdrawal whichever is lower, less the amount of loan, if any. The withdrawal can be put to any use and is not required to be refunded.
9) On maturity, the credit balance in a PPF account can be withdrawn. However, at the option of the subscriber, the amount can be continued for two successive block periods of five years each, with or without deposits. During the extensions the account holder can make one withdrawal per year, subject to the condition that the total amount withdrawn during a 5 year block does not exceed 60 percent of the balance to the credit of the account at the beginning.