Deposits with interest capitalization
Investment of funds in the escrow account is not the only way of salvation savings from inflation. Thanks to Deposit deposits, in a stable economy, you can even increase your savings.
Deposit is the least profitable financial instrument, but at the same time the least risky. If you keep deposits in different currencies and more or less stable banks (the rule of baskets and eggs has not been canceled yet), the risk of losing your savings is practically reduced to zero.
So, if you decide to put money on Deposit, you need to know a few secrets of this “kitchen” to maximize their “blood”. The first and most important question: “What type of Deposit to choose?”. In Russian banking practice, the most common two types of deposits by type of interest accrual:
With interest at the end of the term.
With interest capitalization.
The essence of the first Deposit, or as it is called a classic Deposit, is that the Bank for the initial amount of investment or the amount that was formed on the day of the expiration of the Deposit (for deposits with the possibility of depositing) one-time has agreed in the contract interest. That is, the Bank on the last day of the contract will charge interest on the amount in the account.
What is a Deposit with capitalization?
A Deposit with interest capitalization is a Deposit on which the Bank accrues interest specified in the agreement at certain periods of time (day, month, quarter). In simple words: the Bank charges a monthly rate on the account balance, and the next month – on the balance, taking into account the previous charge.
Difference in profitability of two types of deposits
If the classic Deposit is more or less clear, then the Deposit with capitalization should talk in more detail. Many experts consider this Deposit more profitable than the classic one. We can easily check it.
The formula is used to calculate the profitability of the Deposit:
P – initial Deposit amount;
Z – interest paid for the specified period;
I – contractual annual interest rate;
J – number of calendar days in the period for which the capitalization is carried out;
K – calendar days of the year.
Modern technology will help to quickly cope with this task. To calculate the profitability of the Deposit, you can use the MS Office Excel application as the most visual and easy to use. So, take for example, 300 thousand rubles, divide them equally and put two deposits in a conventional Bank at 15% per annum, for a period of one year. For simplicity of calculations, we assume that the beginning of the Deposit will be January 1, and the end, respectively, on December 31. For a Deposit with capitalization, interest will be accrued on a monthly basis, and for both deposits there will be no possibility of investment.
Calculate the profitability of the Deposit with capitalization. To do this, first calculate the monthly interest rate. For January it is calculated as 31/365*15%. That is, the annual rate is divided by the number of calendar days in the year and multiplied by the number of days in the reporting month. As a result, we get 1.27%. Then we calculate the amount of interest for the reporting month, multiplying the amount at the end of the period by the monthly interest rate. Making calculation, we obtain 1910,96 rubles. Add up the amount at the end of the period and accrued interest, we get 151910.96 rubles, which will accrue interest in the next month. Having calculated in this way the capitalization in subsequent periods (see table 1), at the end of the Deposit period we will receive 174113,05 rubles or 24113,05 rubles of profit.
Now calculate the profitability of the classic Deposit. To do this, simply multiply the annual rate by the amount at the end of the period. I. e. 150,000*15% and get 22500 rubles profits (see graph 1).
As we can see, under equal conditions, the Deposit with capitalization allows you to get a greater yield than the classic Deposit.
It is worth noting that banks tend to try to lower the interest rate on deposits with capitalization in comparison with classical deposits. Therefore, you need to take into account the difference in interest rates when deciding on the type of Deposit.
Opening a Deposit with capitalization
Opening a Deposit with interest capitalization is not fundamentally different from opening a classic Deposit. When making a contract for the opening of this Deposit, it is necessary to adhere to several important principles. First, you need to carefully read the contract. In addition to the General provisions, it should clearly indicate the interest rate and the period for which the Deposit is capitalized. If the wording of these parameters is blurred in the contract, which is quite rare in modern banking practice, it is better to refrain from concluding such a contract.
To make a decision about the future Deposit, do not hesitate to ask a Bank employee to read the profitability of different types of deposits under the terms of the Bank. It is desirable that the calculations of the profitability of the Deposit were fixed in the Deposit agreement, in this case, you will protect yourself from possible misunderstanding of the Bank’s conditions, because there are many interesting things that Bank employees prefer to keep silent. Secondly, when determining the financial institution for the Deposit, it is necessary to take into account its financial stability. Attractive interest rates, both on classic deposits and on deposits with capitalization can play a cruel joke when the Bank does not have the funds to pay it. Therefore, it is better to conclude a Deposit agreement with the banks of the top ten.
Features of taxation
Taxation of income from deposits with capitalization is carried out on the same grounds as income from classical deposits. However, here you need to know some nuances. For example, if the extension of the Deposit its interest rate is 5% higher than the discount rate of the Russian Central Bank, the profit on such a Deposit will have to pay the state 35%.