Savings and investments: BL

Investments could be current or long-term, whereas savings are always of a long-term nature

Deployment of funds can be done in two ways: Investments and savings.
There is no specific definition for the term ?savings' as it is not a part of business. Accounting Standard 13
defines an investment to be funds set apart with the objective of growth, security or earnings.
Thus there are three objectives of an investment ? growth, security or income.
Investments are classified as current or long-term. Current investments are those held for short periods
(conventionally for less than 12 months) whereas long-term investments are held for longer periods. Savings
stand on a different footing altogether.
Objective: The objective of investment does not exist in the case of savings. The objective of savings is to
save for the rainy day or to meet unforeseen eventualities. A person saving money is interested in the
availability of funds at a future date and earnings from savings become secondary.
Duration: Investments could be current or long-term, whereas savings are always of a long-term nature.
It is only individuals who can save. A business entity does not save. Savings are personal in nature whereas
investments constitute an asset and appear on the asset side of the balance sheet. Savings are properties
while investments are assets.
Regularity: Savings are made over a long period on a regular basis, whereas investments tend to be
sporadic in nature.
Sources: Savings are made out of income while investments can be made out of borrowings also.
Tax benefits: Savings by way of life insurance premium, national savings certificates, etc, are eligible for
deduction from taxable income (if they are paid out of income chargeable to tax) whereas investments are
not deductible.
Certainty: There is no certainty that the amount invested would come back, whereas there is no such risk in
the case of savings. Fixed deposits with banks (up to a certain limit) are assured, even if the bank goes into
liquidation. Amounts invested in shares may, at times, have to be written off.
Types of savings
Savings can be made through many ways. It could be by way of bank accounts such as savings bank
accounts, recurring deposits, fixed deposits, etc.
The banking sector offers certain small benefits to savings accounts, which are not available to current
accounts, such as cheque books that are charged for in the case of current accounts but free of charge in
savings accounts. Small interest is paid on savings while no interest is paid on current accounts.
They may also be by way of National Savings Certificates and the like issued by the National Savings
Organisation. Contribution to provident fund during the active life of a person is a long-term savings, which
would come in handy when the person retires.
The income generated out of savings (except for interest on provident fund accounts) is chargeable to tax.
Specific exemptions have been provided for in the Income-Tax Act for the earnings from life insurance
policies making the maturity value of insurance policies as also the periodic money back received from
insurance exempted from the tax purview.
Types of investments
Investments could be fixed income yielding investments such as bonds and debentures. They may also be
fluctuating income yielding investments such as investment in shares and mutual funds.
AS 13 also provides for ?investment property?, where investment could be in the form of real estate. Where
an entity acquires landed property out of its disposable funds with a view to dispose it of at a profit at a later
date, it qualifies to be investment property.
The resolution passed for such acquisition should specify it to be investment property.
In such a scenario, the property so acquired will be disclosed under the head ?investments? and not under
the head ?fixed assets?.
It being so, the entity cannot charge depreciation on this property as it is not an asset. But if the entity
decides to utilise the ?investment property? as a business asset, the property ceases to be an investment
and should be disclosed under the head ?fixed assets?. In such a case the entity is entitled to claim
depreciation on that property from the time the asset is first put to use.
Is FD an investment?
A business entity cannot categorise its fixed deposits with banks as investments. A fixed deposit is made for
a defined period of time. This deposit could be taken to meet a business exigency or when the funds are not
immediately required. The objective of investments is absent in the case of a bank fixed deposit. No doubt,
the fixed deposit yields certain income. The deposit is not made with the objective of earning income or for
growth.
The Companies Act also prescribes fixed deposits to be disclosed under the head cash at bank on deposit
accounts under the head ?current assets, loans and advances' and not under the head ?investments'.
But it may not be so in the case of an individual. The person may put the retirement benefits into a fixed
deposit with a bank and live on the interest so generated by the deposit. Under these circumstances, the
objective is earnings and sense of security, which qualifies to be an investment.
Generally, fixed deposit qualifies to be savings. Considering this, the I-T Act has clubbed fixed deposits for a
period in excess of five years to be eligible for deduction under Section 80C.
Life insurance premium
The objective of life insurance premium is for the protection of the survivors in case of death of the assured.
Premium is paid over a long period of time to converge in to a lumpsum at the end of the term of the policy.
Insurance premium is paid out of the earnings of the person. Therefore, it is more of savings than
investment, though, it is arguable that it provides security and hence is an investment.