Moneymanagement’s Weblog

Bank Deposits score over Postal Deposits

Posted in small savings, Uncategorized by moneymanagement on December 13, 2007

This is a tale of two friends, Amit and Vijay, in their 50ies. They met in the Mumbai local trains 15 years back and become fast friends. Both have tried to catch the same local home whenever possible. In their 45 minutes journey together, they would discuss everything under the sun but the all time favourite was investments. As they grew older their focus has shifted from the stock market and mutual funds to safer avenues.

This year with the Diwali bonus amount Amit is keen to take advantage of the higher interest rates prevailing and invest the amount in a fixed deposit. Vijay however is a diehard fan of Post Office Saving Schemes and is planning on putting in his share of bonus into a Postal Deposit. On the face of it both avenues of saving are attractive but which is the best choice?

The Fixed Deposit Advantage

Fixed deposits (FDs) have conventionally been popular investment avenues among risk-averse investors. With the proposition of assured returns and safety of capital, FDs are right up the alley of risk-averse investors. A fixed deposit is meant for those investors who want to deposit a lump sum of money for a fixed period; say for a minimum period of 15 days to five years and above, thereby earning a higher rate of interest in return. Investor gets a lump sum (principal + interest) at the maturity of the deposit.

Bank fixed deposits are one of the most common savings scheme open to an average investor. Fixed deposits also give a higher rate of interest than a savings bank account. The facilities vary from bank to bank. Some of the facilities offered by banks are overdraft (loan) facility on the amount deposited, premature withdrawal before maturity period (which involves a loss of interest) etc. Bank deposits are fairly safer because banks are subject to control of the Reserve Bank of India.

Rate of Interest

Rates of Interest currently are at a high at around 9%. There is always additional 0.5-1% for senior citizens

Withdrawals

Withdrawals can be made from fixed deposits fairly easily. There are usually penalty for early withdrawals. These days private sector banks offer sweep facilities for fixed deposits or so called “unfixed deposits” which offer the facility to the customers to use the whole or part of the fixed deposits with ease.

Tax Advantage

Tax-saving is no longer the guarded domain of Public Provident Fund (PPF) and National Savings Certificate (NSC). Tax-saving FDs which for a period of over 5 years are offered by banks are also eligible for deduction under Section 80C. However the interest earned on other Fixed deposits is taxable according to the tax slab you fall in. Bank fixed deposits with a maturity of five-years and above is allowed tax deduction up to Rs 1 lakh under section 80C from fiscal 2006-07.

Postal Time Deposits – The poor Cousin

The Post Office offers a vast range of small saving instruments. They are very popular because the wide access of the post offices. One of the saving schemes offered is a Post Office Time Deposit Account.

Prima facia this deposit is similar to the Fixed Deposit Accounts offered by banks.

The deposit can be opened for 1,2,3 and 5 years from any post office or from postal agents who will complete the formality for you.

The deposit is made only once in a Time Deposit Account, while opening the Account. The deposit shall be in multiple of Rs.50 with minimum Rs.200 and there is no maximum limit for amount of deposit in an Account. The deposit shall be repayable only after the expiry of the period for which it is made. On maturity, the depositor gets back the amount deposited initially along with the interest as applicable from time to time, on the production of the passbook accompanied by a written application, in the Post Office Savings Bank.

Rate of Interest

Rates of Interest currently are at a high at between 6.25% -7.5%. The rates are decided by the Ministry of Finance and do not really move with the market. Hence we will find that the bank fixed deposit rates fluctuate easily whereas these rates are more or less fixed for a long period.

Withdrawals

The deposited amount is repayable after expiry of the period for which it is made viz: 1 year, 2 years, 3 years or 5 years. Premature withdrawals from all types of Post Office Time Deposit accounts are permissible after expiry of 6 months with certain conditions. If deposits made for 2 years, 3 years, or 5 years are prematurely withdrawn after one year, the interest will be paid at a rate 2% less than the rate applicable to the period for which the deposit has run.

Tax (Dis)Advantage

The postal time deposits are severely disadvantaged over bank deposits since the interest on these deposits are not tax free. Tax is not deducted at source but must be included in tax computation under the head of ‘Other Incomes’.

Let the figures speak

The actual figures speak much larger than any explanation can as to which avenue has become the preferred one for the investor. It is fairly clear that Amit is on the right track by preferring to put his bonus into bank fixed deposit. If Amit puts in Rs.20,000 in a fixed deposit of a bank at the current rate being offered of 9.5% p.a. and he will get Rs.32,100 at the end of 5 years. The interest amount Rs.12,100 is taxfree.

Whereas they follow Vijay’s paths of investment, the Rs20,000 invested in postal time deposits will earn, Rs29,797. What more this amount is taxable. It is clear what is the best choice.

Other Postal Schemes

Monthly Income Schemes

Monthly Income Scheme is an ideal scheme for VRS takers and retired persons, seeking fixed monthly income. Deposit range starts from Rs.1000, which goes up to Rs.300,000 in case of single Account and up to Rs.600,000 in case of joint Account. Monthly Income Scheme Account is transferable from one post office to another and nomination facility is also available for the Account. The current rate of Interest is 8% p.a.

Recurring Deposit

Recurring deposit scheme give a chance for the investor to put aside money for the future at regular intervals. It has a 5 year maturity and can be extended for further 5 years. One withdrawal up to 50% of the balance allowed after 1 year, closure allowed after 3 years with different rate of interest. The rate of return on this deposit is – Rs.10 per month returns Rs.728.90 on maturity

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One Response

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  1. sibaram said, on January 15, 2009 at 7:33 pm

    postal saving scheme is not a good one for fixed deposite for it’s low interest rate as compare to other bank fixed deposite


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