As in the light of economic slowdown and controlled level of inflation, interest rates in Indian economy are going down. The central bank in its August bi-monthly monetary policy meet slashed the repo rate by 35 bps to 5.4% currently. Herein also the fact that the central bank has now mandated linking of retail loans to external benchmark rates, with the lowering of loan interest rate, return rate on bank fixed deposits will further go down.
And at this juncture, investors who prefer high safety are looking at alternative
investment avenues such as post office term deposits and government bonds.
Notably some of the banks including the likes of SBI, Kotak Mahindra Bank and now in a latest move Bank of India have slashed FD rates for the second time in just 10-15 days. The interest rates on bank fixed deposits have fallen by 50-100 basis points or 0.5-1% and currently fetch a maximum average rate of between 5.5%-6.5% On the other hand, post office term deposits and government bonds earn a higher return of around 7.5-7.75% for a longer tenure.
In the current scenario, it is being observed that investors are re-investing the proceeds from these bank deposits into above specified safe bets:
GOI bonds: After the recent FD rate cut in notable banks, an FD with one year maturity fetches maximum 6.5% for a one-year term at SBI. While, an SBI FD of a longer tenure fetches still lower return of 6.25%.
The RBI savings bond also addressed as government bonds provide a return of 7.75%. These come with a mandatory lock-in of 7 years. Investors can bet on these bonds for as less as Rs. 1000 and in multiples of Rs. 1000 thereafter. There is no cap with regard to the maximum investment limit into these savings bonds.
These bonds are exempt from wealth tax tax under the Wealth Tax Act, 1957. At the same time, the interest on these bonds will be chargeable to tax as per the Income Tax Act, 1961 in accordance with the current tax provisions.
Post office term deposit: These are also highly safe with government of India backing and investors can start in these term deposits for as less as Rs. 200. The return on 1-3 year post office term deposit is 6.9% while a 5-year term deposit at post office provides return to the tune of 7.7%. There is no cap on maximum investment in these deposits. Interest income is taxable similar to FDs.
Conclusion: Financial advisors looking at the current scenario of lowering interest rates and volatile stock markets which failed to yield return in last one year, advice on these products as safe investments with fixed returns especially for retirees and other individuals is not taxable or fall in the marginal tax slab category.