September 27, 2016
Fixed Deposits as Investment and Assets
Fixed deposits are part of your investment portfolio. They can be long or short term deposits that earn an interest on the amount invested. Individuals, businesses, HUF, and similar entities can open a Fixed Deposit.
You can choose from various Fixed Deposit Schemes offered by NBFCs. These can vary by tenure, tax benefits, interest offered, fixed time periods, special purpose FDs like income generating deposits and so on. If you want to choose a relatively short tenure for your FD but still stand to earn more, then go in for Special FD schemes where you invest for a specific number of days. This will get you a slightly higher rate of interest than the standard FDs. Similarly, tax saving Fixed Deposits and other long term fixed deposits also help you earn higher interest.
Corporate Fixed Deposits are usually offered by commercial entities to help people raise funds. You’ll almost always get the highest interest rates on FD from them as these business entities want to attract more deposits to increase their capital. However, make sure that you read reviews of these FDs and choose to invest only with companies that have AA ratings and above.
Businesses and Asset Classifications
Assets are resources that are owned by a company and are utilized for various purposes at different times. Investments are also part of a company’s assets; they are a financial resource.
Businesses acquire several resources to help in their operations. These include cash, financial resources like investments, machinery, tools, and some non-physical assets like goodwill, trademarks, and brand identity.
Investments help build cash resources for a company, either ready cash, short term investments or long term investments. A business firm can invest in other companies, they can buy land or a house and try to sell these to raise cash for the business at a later date. Usually, ready cash and short term deposits provide them with the funds needed to conduct their daily operations.
Fixed Deposits as Business Assets
Fixed deposit schemes offer an attractive way to put aside funds that might be needed in the future. These debt instruments offer security for the invested amount, and though the growth potential is not high, your investment does earn some interest. This is a good way to ensure liquidity as well as making an investment.
Most fixed deposits, except a few like tax saver FDs, can be easily closed before term if there is a cash crunch. You can also choose to take a loan against the deposit and avoid foreclosure penalties. Thus they are fairly liquid assets, regardless of the tenure of investment.
Accounting and Fixed Deposits
Accounting guidelines help to decide how to classify the various assets owned by a company or individual. If it is a tangible financial asset, classifying it as a current or noncurrent asset would depend on the convertibility or the liquidity of the asset. Though all fixed deposits are liquid assets up to a certain extent, the tenure of the FD is considered for accounting classifications. These are based on AS 3 and Schedule VI guidelines. For fixed deposits, the classification is one of these – cash, current, or noncurrent:
- If the Fixed Deposit is for a tenure of three months or less, it is listed under cash or cash equivalent in a journal entry
- If the maturity period is less than a year after balance sheet date, it shows up as a current asset
- If the maturity period of the deposit is more than a year after the Balance Sheet date, it is listed as a noncurrent asset.
Significance of Asset Declaration – A Footnote
Building a detailed list of assets, classifying and recording them formally is not important only for businesses. It can be equally helpful for individuals too. In a business, it helps in quickly reviewing the resources it has, and the category of resource to which an asset belongs. This helps the business identify those assets that are quickly convertible into cash and those that are not so easy to liquidate.
It helps in the declaration of assets for tax purposes and know about the tax benefits from investing in Fixed deposits.
Formal records of assets also help individuals and other entities to assess their net worth and to pay taxes. Income tax requires a detailed declaration of assets. Income tax is levied upon assets that earn an income, like investments in bank deposits, and shares.
Wealth tax is another direct tax that also needs details of an entity’s possessions. Wealth tax is levied on assets that do not provide an income, like land, jewellery etc. However, from the financial year 2016-17 onwards, wealth tax has been abolished though the surcharge on the earnings of the very rich is in place. In fact, the super rich, that is, those who earn in excess of Rs. 1 Crore per year, now have to pay an additional 2% on their annual income as surcharge.
This has been made to streamline tax collection. Taxpayers now have to provide a detailed list of their assets in their IT returns. This will be used for verification of declared assets by taxpayers. By abolishing wealth tax and focusing on the collection of surcharges from the wealthy, the government has brought more people under the tax net, as a sizably larger number of people file IT returns than those who file their wealth tax details.