Interest rate in the economy seems to be at a cross road. After lying low for several years now, the rate of interest may witness some movement upwards in the near future or may continue to remain as it is. Although, the long term view for the rates still remains to be low, the short to medium term rate hikes may not be ruled out.
RBI has already kept the repo rate constant for several months now, even the post office savings rates remain unchanged over the previous few months in a row.
If inflation goes out of the RBI’s comfort range and global inflation leading to rate hikes happens at a quicker pace, a rising rate scenario may come knocking sooner than expected. According to a recent SBI Research report, there will be large pressure on bank deposit rates in the near future.
Till then, as an investor looking to park funds in a fixed income investment that gives assured returns, NSC, KVP and bank fixed deposit ( FD) are the safe investment options to look at. Let us look at each of these investments:
National Savings Certificates (NSC)
National Savings Certificates (NSC) are 5-year deposits and can be made in post offices. Currently, the rate of interest is 6.8 per cent compounded annually.
NSC is a one-time investment and the lump sum invested is locked in for a period of 5 years. There is no interest payment on a monthly or annual basis to investors because the interest is accumulated and paid only on maturity along with the principal invested.
The minimum investment in NSC is Rs 1000 which grows to Rs 1389.49 after 5 years. If you buy the NSC for Rs 1 lakh today, it will grow to about Rs 1.38 lakh after a period of 5 years or 60 months. And, the NSC maturity amount of Rs 10000 will be about Rs 13890 after 5 years.
There is no maximum limit of investing in NSC but tax benefit under Section 80 C is only up to Rs 1.5 lakh per financial year. If you buy the NSC for Rs 3 lakh today, it will grow to about Rs 4.17 lakh after a period of 5 years or 60 months.
For those who want to save tax on their investments over a five-year period, the 5-year tax-saving bank FDs and 5-year NSC are the options to consider. However, NSC offers a higher rate than tax-saving 5-year bank FDs and may be considered if one is ready to opt for cumulative interest on maturity.
Bank Fixed Deposit
Most leading banks including SBI, ICICI and HDFC bank are offering a rate of interest of around 5.5 per cent on 1-10 year deposits.
Bank FDs carry a fixed rate of interest for a fixed tenure ranging from 7 days to 10 years. Senior citizens always get an additional rate of interest of about 0.5 per cent on FD’s in all banks.
You may opt for a sweep-in deposit in which any amount above a certain threshold limit in the savings account is automatically converted into an FD.
Effectively, you end up earning a higher rate of interest than what you would earn in the savings account. A 5-year tax-saving fixed deposits (FD) qualifies for tax benefits under Section 80C of the Income Tax Act.
Kisan Vikas Patra (KVP)
Money invested in Kisan Vikas Patra (KVP) doubles on maturity. The minimum amount of KVP is Rs 1,000 while there is no maximum limit. The amount invested doubles in 124 months and interest along with capital is paid only on maturity.
Currently, the KVP carries a return of 6.9 per cent compounded annually. The two key downsides of investing in KVP are – One, the interest earned is fully taxable as per one’s tax slab and secondly, there are no interest payouts during the period of investment.
For someone looking for monthly or quarterly interest payments, the KVP is not the right investment to consider. There is no tax benefit in KVP for the investors.
As far as safety of money is concerned, NSC and KVP are backed by sovereign guarantee while deposits in banks are insured up to Rs 5 lakh per investor.
If you are looking to save tax, then out of NSC, KVP and 5-year bank tax saving FD, opting for NSC helps.
Else, if you want to keep funds liquid, then use bank FD as an investing option. While investing in bank FD, use the ‘laddering’ approach to lock-in funds across varying tenures. Finally, remember, the interest income earned in all three of these investing options is fully taxable in the hands of the investor depending on the income slab.