Product crack: Holiday savings account

Many people go on a holiday at the last moment, while others plan in advance. If you belong to the latter group, expenses can be planned in advance. Thomas Cook’s holiday savings account is one such product.

HOW DOES IT WORK?

The account is like a recurring deposit (RD)—you have to invest for 12 months and the 13th month instalment will be a combination of the interest you earn and a top-up from Thomas Cook. The deposits do not stay with the company. For this, it has tied up with various banks to collect the RDs. As of now State Bank of India, ICICI Bank Ltd, Kotak Mahindra Bank Ltd and IndusInd Bank Ltd offer this product.

First you have to choose a holiday destination from the list provided by the travel company. It offers eight domestic and seven international destination packages. Depending on the cost of the destination, the RD amount will be spread across 13 months. For instance, if you plan to take a trip to Kashmir (one of the destinations on offer), a five nights and six days package ex-Mumbai will cost 44,800 per person on twin sharing basis. For single occupancy, the cost is 53,300, including service tax. For the purpose of calculation, let’s consider single occupancy. Of the total cost of 53,300 you will have to pay 4,100 per month for 12 months. If the bank offers 7.25% interest on the RD, your total amount on maturity will be 51,165. The gap of 2,172 will be funded by the company.

You can change the holiday destination, but this has to be done by the end of the third month after starting the RD. If the change means an increase in the cost, you have to open a new RD of the extra amount. So, if the first RD was of, say, 4,200 but the more expensive destination needs a monthly deposit of 5,200, you have to open a new RD of 1,000. When the first RD matures, the money has to be transferred to Thomas Cook, which will start planning for the holiday 3 months hence. You can take the holiday as soon as the second RD matures. There are no cancellation charges, but if you withdraw the RD midway, can be a penalty of 1%—the interest payable on the whole deposit is reduced by 1%. This penalty applies to some regular RDs too. If you decide not to go on the trip, you will get your deposits plus interest earned but not what the company would have added.

MINT MONEY TAKE

If you are reasonably certain of when you will go on a holiday, your choice of places is what the company has on offer, and you would like to start saving now for the trip, this product could be an option.

“The XIRR (a type of internal rate of return) here is 15.74%,” said Surya Bhatia, a Delhi-based financial planner.

Before choosing a destination, pay attention to the terms and conditions. Also, if you don’t already have an account with the four banks that the travel company has tied up with, you can’t use this product. All the banks offer different interest rates on their RDs. As of now only SBI customers can book this RD directly from the Thomas Cook website. ICICI Bank customers can do so through Net banking. IndusInd Bank and Kotak Mahindra Bank customers have to do this offline. Also, remember that interest earned on an RD attracts income tax as per your tax slab.