Interest rates of small savings schemes have gone up significantly in the last few quarters. Even the interest rate of post office time deposits (POTD) which matures in five years, has touched 7.5 per cent for the July-September quarter of 2023. At a time when major private and public sector banks offer an interest rate of 7-7.25 per cent on fixed deposits (FDs) maturing in five years, should you opt for five-year post office time deposits for a better return? Let’s understand.
The post office time deposit is similar to bank fixed deposits. You invest money at a fixed interest rate for a definite period and earn a pre-determined return. Backed by the government, the money in the post office term deposit is completely protected, with guaranteed returns.
Interest rate compared: 5-year time deposit vs 5-year bank FDs
For the July-September 2023 quarter, you could fetch an interest rate of 7.5 per cent on five-year post office time deposits. At a 7.75 per cent interest rate, only DCB Bank offers 0.25 per cent more than what a five-year POTD offers. Meanwhile, major banks such as HDFC Bank, ICICI Bank, Axis Bank, and IDFC First Bank offer an interest rate of 7 per cent on deposits maturing in five years. IndusInd Bank offers an interest rate of 7.25 per cent on FDs maturing in five years. SBI offers an interest rate of 6.5 per cent for fixed deposits maturing in five years. As you can see, you get a relatively higher interest if you invest in five-year post office term deposits than in five-year FDs in most public and private banks.
In 5-year post office time deposits, interest is calculated and compounded quarterly but payable annually. The annual interest may be credited to the savings account of the account holder by submitting an application.
Interest rates of 5-year time deposit vs 5-year bank FDs
Scheme | Interest rate (%) |
5-year post office time deposit (POTD) | 7.5 |
Bank | Interest rate for 5-year tenure (%) |
PUBLIC SECTOR BANKS | |
Bank of Baroda | 6.5 |
Bank of India | 6 |
Bank of Maharashtra | 5.75 |
Canara Bank | 6.7 |
Central Bank of India | 6.25 |
Indian Bank | 6.25 |
Indian Overseas Bank | 6.5 |
Punjab National Bank | 6.5 |
Punjab & Sind Bank | 6.25 |
State Bank of India | 6.5 |
Union Bank of India | 6.7 |
PRIVATE SECTOR BANKS | |
Axis Bank | 7 |
Bandhan Bank | 5.85 |
DBS Bank | 6.5 |
DCB Bank | 7.75 |
HDFC Bank | 7 |
ICICI Bank | 7 |
IDFC First Bank | 7 |
IndusInd Bank | 7.25 |
Kotak Mahindra Bank | 6.2 |
Source: Paisabazaar.com and ET Online
Online FD account opening options
To open a post office time deposit online, you need to have a savings account with India Post. Otherwise, you can open the account at any post office.
However, it is relatively easier to open a fixed deposit (FD) online with any major public or private sector or small finance bank, thanks to the swift Internet banking facility.
Who can open 5-year post office time deposits and 5-year bank FDs?
You need to be a resident of India to open a deposit in the post office. A minor above 10 years can open an account in the post office in his or her name.
A resident Indian can open a fixed deposit in any bank in India. Several banks also allow children to open a regular FD account provided they have a guardian who will handle the account. Some deposits are available only till the child attains the age of 18 years.
How much can you invest in 5-year POTDs and 5-year tax-saving bank FDs?
The minimum investment limit is Rs 1,000 for a five-year POTD. There is no maximum investment limit. You enjoy a sovereign guarantee.
Do note that you can only invest up to Rs 1.5 lakh in five-year fixed deposits in banks. So, if you want to park more than Rs 1.5 lakh to get a fixed return of 7.5 per cent, you may consider a 5-year POTD over 5-year tax-saving bank fixed deposits.
Can you prematurely close 5-year POTDs or 5-year bank FDs?
For post office term deposits, no premature withdrawal is allowed within six months. If you close your 5-year post office deposit after six months and before one year, you will get the interest rate applicable for a post office savings account. If you want to prematurely close your 5-year POTD account after one year, the interest rate will 2 per cent less than the term deposit rate for completed years such as one-year, two-year, and three-year term deposit interest rates. For any remaining fractional period of less than a year such as months or days, the interest rate of post office savings deposit will be available.
The premature withdrawal option is not available for five-year tax-saving fixed deposits. So once invested, your money will be locked in for five years.
Income tax rule: 5-year POTDs vs tax-saving bank FDs
Interest income from both post office time deposits and bank fixed deposits is taxable in the hands of the investor.
You can claim a deduction of up to Rs 1.5 lakh under Section 80C of the Income-tax Act, 1961 for investing in five-year post office deposits. You are eligible to claim the same deduction for investing in tax-saving FDs too.
There is no tax deducted at source (TDS) applicable on five-year post office time deposits. If the total interest earned on your fixed deposits goes above Rs 40,000 (Rs 50,000 in the case of senior citizens) in a financial year, the bank is liable to deduct TDS at the rate of 10 per cent from the interest amount.
5-year bank FDs vs 5-year POTDs: Where to invest?
As far as safety is concerned, both are relatively safe. However, post office time deposits have an edge over fixed deposits because bank FDs are insured only up to Rs 5 lakh. “Post office deposits are technically safer than bank FDs as they are Indian Government-backed and come under the small savings scheme. Bank FDs are also safe under RBI’s supervision but technically, only have a deposit guarantee of Rs 5 lakh. In any case, both banks and post offices are currently offering reasonably high-interest rates. So if one is looking at safe options to park money, both can be considered for booking FDs for a long tenure in the prevailing high-interest rates,” said Dev Ashish, a SEBI Registered Investment Advisor (SEBI RIA), and Founder of StableInvestor.com.
While the FD rates offered by post offices now are slightly higher than what many banks offer, one should also look at factors like operational convenience and ease of dealing with post-office, said Dev Ashish.
One of the major limitations of opening post office term deposits online is that depositors must have an existing account with India Post, said Gaurav Aggarwal, Senior Director, Paisabazaar.
Further, senior citizens do not get the benefits of higher interest rates in 5-year POTDs, unlike FDs where most banks usually offer an additional interest rate of 0.5 per cent on senior citizen FDs, suggested Abhishek Kumar, a SEBI Registered Investment Advisor (SEBI RIA), and Founder of SahajMoney.com. So, senior citizens may be better off by going for a 5 year FD in a bank.
For those who are not senior citizens, POTD may be a better option than many banks. “A 5-year Post Office Time Deposit (POTD) is a good investment choice for those who want capital protection, save on income tax, and get relatively higher interest rates at the same time. Deposits under this instrument are considered safe as it has sovereign backing and depositors can also claim a deduction of up to Rs 1.5 lakh under Section 80C,” said Aggarwal.