Some extra trouble, but well worth it

Try this mix of post office savings schemes, and you could get a rate of return as high as 14 per cent

SRIKUMAR BONDYOPADHYAY

Invest Rs 60,000 now and get over Rs 1,10,000 six years later—a guaranteed annual return of over 13 per cent! Never heard of any such assured income scheme? You’re right, what we are talking about here is not a single income scheme, rather an integration of two schemes, the Post Office Monthly Income Scheme (POMIS) and the Post Office Recurring Deposit Scheme (PORDS).

Tax-savings instruments offered by the post office, such as the National Savings Certificate (NSC), the National Savings Schemes (NSS) and the Public Provident Fund (PPF) are much in vogue, though when it comes to time deposits for other than tax purposes, investors have traditionally favoured commercial banks over the post office. But after Budget 2001-02, the Post Office Savings Bank has come out as a clear winner over the commercial banks. This is because the government has capped the tax-free interest income from bank deposits to Rs 5,000 per annum (beyond which the interest income is taxable and the tax deducted at source).

However, at the same time, the government has also increased the interest income limit under Section 80L to Rs 12,000 per annum and interest income from the post office savings schemes is tax deductible u/s 80L.

The post office advantage, however, is bigger than this. Banks don’t offer a maturity bonus with any of their fixed deposit schemes, but the post office does. Banks don’t have a monthly income scheme per se, but the post office does. And the post office’s monthly income scheme comes handy in leveraging your investment to earn more interest than offered by banks.

Let us illustrate this with a numerical example. Suppose you have an investible surplus of Rs 60,000, which you won’t need for another six years at least. If you are averse to risk, then you have few options for your money—a fixed deposit with a commercial bank, a government security paper in the form of promissory notes (such as secured redeemable bonds) and a savings scheme in the post office.

The first two options are quite safe, but the returns from both are less than what you would get from a mix of POMIS and PORDS.

Invest your Rs 60,000 in POMIS, which offers a simple annual interest rate of 9.5 per cent. The maturity period of the scheme has been increased recently to six years from five years. You will get a monthly interest income of Rs 475 on this amount and a 10 per cent maturity bonus (Rs 6,000) payable at the end of six years from the date of investment.

You now reinvest this monthly interest income in a five-year PORDS. Under this scheme, the annual interest rate is also 9.5 per cent cumulative half-yearly. In other words, for a recurring deposit account of Rs 10, you get Rs 758.53 on maturity after five years. This means that on a Rs 475 account, you will get Rs 36,516 after five years. This recurring deposit scheme also allows you to withdraw 50 per cent of your total deposits, but only after one year from the date of investment. However, you can withdraw the money just once, the rest is payable only at maturity.

Now calculate what you get after six years. Here it is assumed that you open both the POMIS and PORDS within a gap of one month—first the POMIS and then, a month later, the PORDS so that the monthly interest income from the POMIS account goes straight to the PORDS account.

After five years, you get Rs 36,516 from the recurring deposit account. You can also reinvest this amount in a bank fixed deposit for one year—the sixth year—till your POMIS account matures. During the 11 months of the sixth year, you will get a monthly interest income of Rs 475 from your POMIS account. This amounts to Rs 5,225. At the end of six years, you will also get the maturity bonus of Rs 6,000.

So, at the end of six years, the total return on your investment of Rs 60,000 is the summation of what you get from:

a) The Post Office Recurring Deposit account—Rs 36,516

b) One year’s interest from reinvestment of this amount—Rs 2,921 (here we have considered an 8 per cent rate of interest)

c) Eleven months’ interest income from the POMIS account—Rs 5,225

d) 10 per cent maturity bonus on the POMIS account—Rs 6,000

The total return works out to Rs 50,662, which means a rate of return of 14 per cent! This rate of return is equivalent to that offered by most mutual funds (MFs), without any of the risk usually associated with an MF. Of course, you have to take the trouble of going to the post office every month to collect your monthly interest income and deposit it in the recurring deposit account. However, the trouble is worth it when you consider the return.