Investment: Post office term deposits vs bank FDs

Jul 01 2014, 09:46 IST
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SummaryWhat you should do when faced with choosing between post office term deposits and bank FDs

When it comes to risk-free investment, post office term deposits are a handy option. If you plan to open one, but are in a dilemma over whether to go for bank fixed deposit instead, it would be in order to do a comparative analysis.

Interest rates

A post office term deposit is much like a bank FD with tenures of 1/2/3/5 years. However, with post office term deposits, interest rates for each of the tenures are fixed. Interest rates on bank FDs, on the other hand, vary with market conditions, with many lenders coming out with odd term fixed deposit schemes to fix their asset-liability ratio. For example, a bank may come out with a 364-day fixed deposit with interest rates that are 1% higher than for a one-year and 16-day FD.

While you need to be an Indian resident to open a post office term deposit, there are no such restrictions for a bank FD. In fact, NRIs, in many cases, get higher rates of interest.

Deposit amount

The minimum amount for opening a post office term deposit is R200, and its multiples thereafter. Bank deposits have tenures ranging from less than 15 days to over 10 years. The minimum deposit amount, however, varies with banks, and schemes. Many banks keep a higher minimum deposit amount and allow only a few privileged customers to open FDs. The minimum deposit amount may be as high as R10,000 in certain cases.

Closure

A post office term deposit account can be closed after completion of six months, but before one year. After a year, you won’t be able to withdraw your money and close the account before the tenure is over. If you choose to close your account after six months, you will get your investment back without any interest amount. If your close a 2- or 3-year deposit prematurely, you will get interest amount for only the completed years. For example, if you close your account after 18 months, you will get interest only for 12 months.

Banks, on the other hand, have the discretion to charge penal interest for premature withdrawal. However, with competition intensifying among banks, most have done away with this charge. You are allowed to close your account whenever you wish to, and the bank pays pro-rata interest up to the day you closed your account.

Inflation

While banks determine their interest rates with the market rates and inflation in mind, nothing of that sort happens with post office term deposits. Bank FD rates move with changing times, but post office term deposit rates remain fixed. Thus, as inflation rises, real returns come down for post office term deposits. However, post office term deposits are totally risk-free as they are backed by the government. Bank FDs are insured only up to R1 lakh.

Tax implications

Both avenues have a similar tax treatment: there is no tax benefit on deposits with tenures of less than five years. The five-year deposit qualifies for tax deduction under

Section 80C.

If you are looking for a safe investment, bank FDs are suitable for you. They are better than post office term deposits as they give higher returns and the capital also remains protected.

The writer is CEO, BankBazaar.com

THE FACE-OFF

* In post office term deposits, the interest rate for each tenure is fixed. Interest rates on bank FDs vary with market conditions

* A post office term deposit can be closed after six months, but before a year. If you close your account prematurely after six months, you get the investment back without interest. Most banks, on the other hand, have done away with premature withrawal penal charge

* Bank FD rates move with changing times, but post office term deposit rates remain fixed. As inflation rises, real returns come down for post office term deposits

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