[Aroy]

To add to the confusion you may have to pay service tax on the interest of OD

[Bomi]

As of now, there is no service tax applicable, on interest paid on a loan.

[rowhun]

Originally Posted by carboy

http://www.team-bhp.com/forum/indian...ml#post2185574



The option of taking loan on FD doesn't make financial sense even if you ignore the tax you *HAVE* to pay on the FD interest. If you consider that the tax you *HAVE* to pay, it makes it even worse.

Originally Posted by Warwithwheels

The 30% Tax rate is not a flat rate. It depends on which tax slab you belong to. It could be as low as 0% or 10/20% as well.

IF the whole discussion is made on a presumption that an EXISTING FD does exists and you do not wanna break it, then taxation would assume no significance at all. The 30% or whatever% Tax you pay is irrespective of whether you take a OD against it or not!

Yup,
I was aware of the different rates of tax. I was taking the highest slab as the maximum one would have to pay. Ofcourse, you would ideally need to also factor in the Education Cess etc, taking it slightly higher as well.

What my point was, that if we do avail of the OD on the FD, then instead of the simple 1% or 2% interest that one assumes they are shelling out, it would be a higher figure as you are not only paying the interest on that, but also paying the tax on your FD, which one has to keep in mind. If the entire presumption of buying a car did not arise in the first place, then you would end up with an FD which generates some amount of money for you at the end of the term minus the tax on it.

As for whether it is beneficial for someone to take an OD on an FD or not, it really depends on a case to case basis and has more to do with the comfort level of a person's paying back capability.
If you are disciplined and treat the OD also a loan and make payback deposits similar to your EMI, it would mean you are essentially taking a loan at 1-2% rate of interest (+ the tax you pay on FD maturing) as opposed to taking a car loan at 12%. You can also work out other schemes for yourself such as the Balloon payment, Bullet Payment etc, as you do not have the restrictions of a car loan, no hypothecation, and the freedom to structure your payback and your tenure as well.

If person A breaks the FD and uses the entire amount to purchase a car, he ofcourse will still have the amount he saves on EMI and can systematically invest that in schemes like Recurring Deposits, Mutual Funds etc.

With a bit of planning, one can be smart about the purchase of the car. The only question is which is the smartest way.

Also, in the case of using an OD on the FD, or breaking the FD, I am going under the presumption that the FD was created in the first place for a similar purchase, achieving a goal or a dream etc, rather than as an Emergency Fund. If it was meant purely as an Emergency Corpus (for which ideally another FD should always be setup which should never be touched unless there is a genuine emergency), then it doesn't really help you.