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Postal Time Deposits still unattractive despite rate increase

Postal Time Deposits still unattractive despite rate increase

Bank FDs offer higher rates than the hiked Postal Time Deposit rates. But NSC likely to lose favour after the rate change.

Interest rates on Post Office Time Deposits applicable from the next financial year have increased. Starting April 1, 2014, India Post would offer 8.4% for the 1, 2 and 3-year periods and 8.5% on the 5-year deposits instead of 8.2, 8.3 and 8.4% interest paid presently.

But this marginal rate hike still doesn’t justify investments into POTD as other banks are offering 9-9.6% for a 1-2 year fixed deposit and 8.75% to 9.25% for three-year deposit (See table).

There are options to earn a higher rate under bank FDs. For instance, when you opt for bank FDs you can look at odd tenures such as 1 year 1 day or 13 months to get a 0.25% higher rate of interest. This option isn’t available for POTD, which are available for set 1, 2, 3 or 5-year periods.

Institution 1-yr (%) 2-yr (%) 3-yr (%) 5-yr (%)
Post Office 8.4 8.4 8.4 8.5
Axis Bank 8.75-9 8.75 8.75 8.5
Bank of Baroda 9.1 9.1 9.1 9.1
HDFC Bank 8.75-9 8.75 8.75 8.25-8.75
ICICI Bank 8 9 8.75 8.75
Karnataka Bank 9.5 9.25 9 9
SBI 9 9 8.75 8.5

However, if you already hold post office time deposits (that have completed 6 months) for a longer tenure, then you should break the deposits and reinvest, instead of sticking to the old rate applicable prior to April 1, 2014. You will have to bear an interest penalty of 1% on the deposits broken, hence take the step only for long-term deposits.

One can draw similarities for the five-year POTD with the National Savings Certificate (NSC) as both now offer the same rate of interest and offer similar tax benefits under Section 80 C.

A major difference that moves the balance in favour of POTD is the interest calculation and compounding. Under POTD interest is compounded quarterly, while under NSC the norm is six-monthly compounding. Money compounded quarterly gives higher return than that rolled over half-yearly.

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