Post Office Deposits Vs Bank FDs: Don’t just see latest interest rates, this is what you get and don’t get in each

After the recent hike in the key policy rates by the Reserve Bank of India (RBI), commercial banks and the government have increased the interest rates on time deposits/fixed deposits (FDs) and small savings schemes – including post office deposits – respectively, making the investments more attractive.

Although the rates on Post Office deposits are higher than FDs, which vary from bank to bank and tenure to tenure, you should look at all the aspects of the different schemes before investing your hard-earned money in any of them.

Safety of investments: While principal invested and interest earned under Post Office deposits bear sovereign guarantee of the Government of India, amounts invested in FD schemes of commercial banks bear the guarantee of Deposit Insurance and Credit Guarantee Corporation (DICGC). As per the DICGC Act, in case a commercial bank gets bankrupt, the Corporation will refund each account holder, the amount deposited in his or her accounts or Rs 1,00,000, whichever is less. The limit is per person in the bank and accounts include any number of savings bank accounts, current accounts, recurring deposit accounts, fixed deposit accounts and/or any other accounts, except PPF and Sukanya Samriddhi Yojana accounts. So, apart from PPF and Sukanya Samriddhi Yojana accounts, which bear sovereign guarantee, out of total deposits in all other accounts, DICGC will pay maximum Rs 1,00,000 per person. So, Post Office deposits are safer than FDs, although RBI and the government will take all possible measures to prevent a PSU bank from getting bankrupt.

Tax deductions u/s 80C: An investor may get tax deductions u/s 80C of the Income Tax Act, for investments up to Rs 1,50,000 per financial year on investments made in 5-year FDs of commercial banks and Post Offices, apart from small savings schemes like Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY) and National Savings Certificates (NSC). So, for FDs or time deposits of less than 5 years, there will be no tax deductions.

Tax-free interests: Interest earned on PPF and SSY are only tax free. For all other schemes of Post Office and commercial banks, interest earned are taxable.

Tax benefits on maturity amount: Again, the maturity amounts of PPF and SSY are only tax free. The gain on all other investments – be it in Post Office or are taxable.

Liquidity: Although small savings schemes offer higher interest and greater safety, but FDs score over them on liquidity front. So, customers, who don’t want to lock their money for long period, should consider the liquidity factor before investing.