Note that the interest for Kisan Vikas Patra and NSC gets accumulated and is paid on maturity, as they are cumulative in nature, whereas for Post Office Time Deposit Account interest is paid annually.
Most leading banks, including SBI, HDFC Bank, Kotak Mahindra Bank, Punjab National Bank (PNB) and ICICI Bank, have been offering low interest rates on fixed deposits, around 6.5 per cent per annum, across different tenures. They have reduced interest rates on their fixed deposits following the rate cuts by the RBI. Because of this reason, FDs are becoming less attractive for investors. As an alternative, risk-averse investors looking for a fixed-income investment can look at post office small savings schemes. Post office schemes as compared to bank FDs offer a higher rate of return and are safer also.
An investor keen on investing for more than 5 years can look at either of the 3 post office small savings schemes: National Savings Certificate (NSC), Post Office Time Deposit Account (POTD), and Kisan Vikas Patra (KVP).
Note that the interests for Kisan Vikas Patra and NSC get accumulated and are paid on maturity, as they are cumulative in nature, whereas for Post Office Time Deposit Account, interest is paid annually.
Here are the features and benefits of NSC, Post Office Time Deposit, and KVP:
National Savings Certificate (NSC)
NSC currently offers an interest rate of 7.9 per cent, compounded annually but payable at maturity. This investment option comes with the minimum investment of Rs 100, with no upper limit. The tenure for this investment is set at 5 years. The interest of this investment gets accumulated and is paid on maturity along with the principal.
NSC can also be bought either by a minor or on behalf of a minor. NSC investments also qualify for income tax benefit under Section 80C of the Income Tax Act. The interest that gets accrued each year is reinvested and gets qualified for Section 80C tax benefit. Note that the interest earned is fully taxable in the hands of investor. These investment certificates are also transferable from one person to another.
Post Office Time Deposit Account (TD)
The interest on time deposit is paid annually but is compounded on a quarterly basis. Post Office Time Deposit comes with a minimum investment of Rs 200, with no upper limit. This investment option offers a tenure ranging from 1 to 5 years. The interest rate currently offered on TD is 6.9 per cent for tenures between 1-3 years, and 7.7 for a tenure of 5 years.
Investors can also open an account in the name of a minor, and a minor above 10 years can also open and operate the account by himself. One can either open these accounts as joint accounts, or a single account, which can also be converted to a joint account. Deposits from this account can also be transferred from one post office to another.
In the 5-year Time Deposit, tax benefit available is on the investment made. For other tenures, interest earned is fully taxable and gets added to the depositor’s income for that financial year. At the time of maturity, the account is automatically renewed for the same tenure for which it was initially opened. For instance, a 2-year post office time deposit account will be automatically renewed for 2 years.
Kisan Vikas Patra (KVP )
Investment in KVP certificates offers an interest rate of 7.6 per cent payable at maturity but compounded annually. The minimum investment that can be made with KVP is Rs 1,000, with no upper limit. Similarly, with this scheme, the interest that gets accumulated is paid on maturity, along with the principal amount. Note that the amount invested doubles in 113 months, i.e 9 years and 5 months.
KVP certificate can also be bought by a minor or on behalf of a minor. This investment certificate can also be transferred from one person to another and can be encashed after 2.5 years from the date of issuance of the certificate.