Where to invest in lieu of Bank Recurring Deposit to avoid TDS

You have not mentioned the risk profile of your parents, their investment goal and time horizon. Assuming they are looking for an alternative to recurring deposits, you can consider investing in Long Term Income Funds or Monthly Income Plans. Please note that, debt fund returns are taxed as per the income tax rate of the investor if held for less than 36 months. If debt funds are held for more than 36 months, then capital gains are taxed at 20% with indexation benefits. If your parents are in the highest tax bracket long term capital gains tax will be much less than the income tax on the Recurring Deposit interest. You should also note that, unlike recurring deposits where tax is deducted at source, there is no TDS in mutual fund investments. Long term income funds have given 9% returns over a 3 to 5 year investment horizon. With interest rates on a downward trajectory, long term income funds have the potential to give double digit returns over the next 2 to 3 years.

If your parents can afford to take a little risk, Monthly Income Plans are also good investment options. Monthly Income Plans (MIPs) are hybrid debt oriented funds which have usually around 25% of their portfolio invested in equities and the balance 75% invested in fixed income / debt securities. The high debt component reduces the investment risk considerably relative to equity investments. You can think of monthly income plan as a long term income fund with an equity kicker. Because of the equity kicker, top MIPs have give 10 – 14% returns over the last 3 to 5 years.

If your parents want income from their investment, they can opt for the dividend option. While debt fund dividends are tax free in the hands of the investor, the Asset Management Company deducts around 28% dividend distribution tax, before paying out dividends to their investors, which is still less than the tax on recurring deposits / fixed deposits. However, if they do not need the income, they should invest in the growth option with at least a 3 year investment horizon, since it is much more tax efficient than the dividend option due to long term capital gains taxation of debt funds.