Even as the banks have been continuously reducing fixed deposit (FD) rates for over an year now after the RBI since January 2019 has brought about a steep cut in key policy rate by 250 basis points or 2.5 percent, post office savings scheme interest rate have been held constant for the second straight quarter i.e. for October to December of FY21. The last time the finance ministry brought about a rate cut in small savings scheme was for April-June quarter of FY21, wherein it reduced rates to the extent of huge 1.4%.
Now given the huge interest rate differential between Post Office Term deposit and Bank FD of between 0.6 and 1.3 percent, here's how you can go about deciding what to choose:
Any investor who parks his or her surplus funds in some avenue is for earning higher return while at the same time safety of the invested capital is also a prime consideration. Now here we'll look at from all perspectives including safety, returns, liquidity, taxation and ease of redemption in case of pre-mature withdrawal among others.
1. Interest rates on Bank FD and Post office term deposit
After a series of cuts, bank FD rate at the country's leading public run bank SBI has dropped to 4.9% for a one year tenure. For this tenure, a small finance bank like Jana Small Finance Bank is paying 6.9% interest rate but the higher interest rate being offered carries its own risk. Others in the sector like new age bank Bandhan Bank on FDs of 1-year maturity is giving out 5.75% return while HDFC Bank and ICICI Bank are offering 5.1% and 5% rate, respectively.
Now coming on to term deposits with Post Office these are still lucrative given the safety they carry because of sovereign guarantee together with the higher interest rate for 1-year term at 5.5%. 2 and 3-year time deposit with Post Office also offer same return. Interestingly, it must be noted that before the steep reduction was made effective from April, term deposits of 1, 2 and 3 years fetched 6.9% return.
From a five-year investment perspective:
5-year FD at SBI fetches interest rate of 5.4% that at HDFC Bank and ICICI Bank offers 5.3 and 5.35%, respectively. While Jana Small Finance Bank 5-year FD comes with 7% return and Bandhan Bank offers 5.75% return. In comparison 5-year term deposit at Post office fetches 6.7% return and this is by far better than considering FD with Jana Small Finance Bank for gaining 0.3% higher return (needless to say because of the safety parameter).
FDs at both banks and Post office are taxed in a similar fashion and will be based on the investor's choice of income tax regime as well as the income tax in which he or she falls.
And so for an individual investor who is in the highest income tax slab of 30%, post tax return from SBI 1-year deposit, SBI 5-year deposit, Post office 1-year term deposit and Post office 5-year term deposit shall be as below:
|Investment instrument||Post tax return (in %)|
|SBI 1-year deposit||3.37|
|SBI 5-year deposit||3.71|
|Post office 1-year term deposit||3.78|
|Post office 5-year term deposit||4.6|
So, for the investor in higher tax bracket, investment in post office term deposit shall be more rewarding.
Term deposits at Post office which is part of the government's small savings scheme to boost household savings is highly safe with sovereign guarantee. And bank FD instruments on the other hand are insured up to the extent of Rs. 5 lakh under the Deposit Insurance and Credit Guarantee Corporation (DICGC). Though in previous instances, investors concerns on the safety of their bank deposits surfaced owing to financial stress in banks like Yes Bank off late, but nevertheless the RBI has always come to the rescue and never did it let any bank fail.
So, here also if there is no backing at the last minute from the RBI, one may be better off going for Post office scheme for higher safety which shall be the prime concern in such uncertain times, even at the cost of lower returns.
Both of the instruments i.e post office term deposit and bank FD offer liquidity but with some conditions attached. While for bank early redemption or premature withdrawal of the FD is allowed easily with no time constraints and with only interest penalty implication, the same is not true for Post office term deposits.
In case of post office term deposits, withdrawal cannot be made in the first six months of the deposit and if the redemption is made anywhere between 6 and 12 months time from the deposit issuance date, interest rate as applicable on Post office savings account at the time shall be payable, currently Post office savings rate stands at 4 percent per annum.
So, here the bank FD fare better than post office term deposit if you are hoping that any financial need can arise in say near term.
5. Operational ease:
Yet again like you manage your savings account and in these technological times operate your account digitally, while for bank FDs which are linked to your savings bank account, you may be able to monitor your return from FDs over the years and can even ascertain on other parameters, facilities of similar scale such as net banking and such other stuff shall not be offered in post office schemes.
Though over the years, India Post is also fast gearing up to maintain its technological pace with its peers in the industry. So, depending on your priorities and expectations from the investment avenue you have the right to exercise the choice that will serve you best.