As bank fixed deposit interest rates fall, are post office small saving schemes a better option?

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Updated: July 30, 2019 4:59:53 PM

While some investment options such as NCD, corporate fixed deposits, could be offering a higher rate of interest, the safety of capital need not be ignored by the investors.

Post office small savings, small savings, Bank fixed deposits, Investment options, RBI, repo rate, interest rateThe small savings rate of interest, which are declared by the government at the start of every quarter, has come down for the July-September 2019 quarter.

With the Reserve Bank of India (RBI) cutting the repo rate by 75 basis points since January 2019, the writing on the wall is clear. The interest rates are on a downtrend and, consequently, the bank fixed deposit rates and even the post office small savings rates are set to come down over a period of time. While the small savings rate of interest, which are declared by the government at the start of every quarter, have come down for the July-September 2019 quarter, some of the banks such as SBI Bank, HDFC and Bank of Baroda, too have resorted to rate cuts on their FDs recently.

The falling interest rate scenario will make investors scout for investment options offering a higher yield. While some of them such as NCD, corporate fixed deposits, could be offering a higher rate of interest, the safety of capital need not be ignored by the investors. Post office small saving schemes carry a sovereign guarantee on both capital and interest earned. Similarly, bank FDs are equally safe even though they are insured up to Rs 1 lakh per bank under DICGC-Deposit Insurance and Credit Guarantee Corporation.

So, what are the options for fixed income investors in the current environment? Over 1 to 3 years, the post office Time Deposit (POTD) is currently offering a higher rate of interest of 6.9 per cent than some of the bank FDs over the same period. On a 5-year deposit, the differential between PO Time Deposit and a bank FD of 5 years is nearly 125 basis points. The 5-year POTD is currently offering 7.7 per cent per annum while, SBI offers ( from Aug 1) 6.5 per cent, Bank of Baroda offers 6.45 per cent and HDFC Bank offers 7 per cent.

While senior citizens may continue to consider investing in senior citizen savings scheme (SCSS) at 8.6 per cent, taxpayers looking to invest in a fixed income tax saver may consider 5-year NSC currently offering 7.9 per cent. PPF remains a robust investment for the long term with 7.9 per cent tax-free interest and annual compounding.

The post office interest rates were last revised in the Jan-March quarter of 2019, while it was kept unchanged in the April-June 2019 quarter. Even in the July-September quarter, the reduction was 0.1 per cent across products.

SBI has recently announced a reduction in its FD rates from August 1. Over longer tenure, the cut is up to 0.20 per cent while over shorter tenors, i.e. up to 179 days, the cut is significant as the rate of interest has been cut by 50 to 75 basis points. Earlier this month, few banks such as Bank of Baroda (BoB), HDFC Bank and Kotak Bank had already revised their deposit rates.

If at all you need to invest only in banks but find the front-line banks offering a lower rate of interest, you may consider FDs of Small Finance Banks as they are currently offering higher rates across tenures. For example, Utkarsh Bank is offering 8.50 per cent on deposits between 1 year to 455 days, while JANA bank is offering 8 per cent on deposits between 3 and 5 years.

Remember, interest earned on FDs is fully taxable in the hands of the investor in the year of receipt. FD’s are suitable for capital reservation and for earning a regular income and not for capital appreciation over the long term. The inflation-adjusted post-tax return is very low in FDs.

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