Fixed Deposits vs Post Office Savings Schemes: Where should you invest for higher returns?

Investors love to earn higher returns on their investments but without taking too much risk. Typically, high-risk investment options give you higher returns but the Post Office Savings Schemes give you several options where you can earn similar or even higher returns than fixed deposits (FDs) without any risk. Retired people and those who avoid market impact on their investments find the post office schemes the best option to park their money.

Post Office Savings Schemes provide a safe haven for those looking to preserve capital while earning decent returns. However, before investing, you must understand everything about these investment plans.

Interest Rates and Returns

Post Office Savings Schemes often offer competitive interest rates. For instance, schemes like the Senior Citizens Savings Scheme (SCSS) and National Savings Certificates (NSC) provide slightly higher returns than FDs. However, these rates are periodically revised by the government, typically every quarter, so investors must stay updated on any changes that could affect their earnings.

These days FDs by most bigger banks offer an average interest rates between 7% and 7.5% whereas post office schemes backed by the government and retirement plans give you higher returns (more than 8%). Therefore, you must compare your investment horizon and see what fits your goals before you park your money.

Also Read: SIP Calculator: Turn your SIP investments into Rs 1 cr with this simple strategy

Tenure and Lock-in Period

Each scheme comes with a different tenure and lock-in period. For example, the Public Provident Fund (PPF) has a 15-year maturity with a partial withdrawal facility, while NSC offers a 5-year lock-in period. Understanding these durations is crucial to aligning investments with financial goals. In FDs, you get flexibility with regard to tenures but returns in very short terms may not be very attractive and cater to only smaller financial goals.

Tax Benefits

Many Post Office schemes qualify for tax exemptions under Section 80C of the Income Tax Act, such as PPF and NSC. However, the interest earned may still be taxable. For instance, the interest on SCSS is fully taxable, so investors need to consider their tax liabilities when planning their investments. For tax benefits in FDs, you will have to invest in tax-saving FDs with a lock-in period of at least 5 years and early withdrawal may also attract penalties.

Risk and Liquidity

These schemes are risk-free, as they are backed by the Government. However, they lack liquidity. Most schemes penalise early withdrawals, making them unsuitable for those needing quick access to funds.

Investment Limits

There are investment limits in these schemes. For instance, PPF has an annual cap of Rs 1.5 lakh. It is important for investors to diversify and not solely rely on Post Office schemes for long-term wealth creation.

Adhil Shetty, CEO of Bankbazaar.com says, “Government-backed schemes offer guaranteed returns and stability, making them a reliable option for preserving capital. Additionally, they provide tax benefits, making them attractive for long-term financial planning. With varying tenures and lock-in periods, they cater to different investment goals, offering both flexibility and security. In uncertain financial markets, small savings schemes act as a safety net.”

In conclusion, while Post Office Savings Schemes are a safe and reliable investment choice, but you must weigh all important factors like liquidity needs before investment.

Compiled by Bankbazaar.com