When it comes to investing in the most traditional way, recurring deposits (RDs) have topped the list of options for many people to build wealth over time. Those looking to start an RD mostly tend to think about going to a bank. But it may not always be the prudent option.
With the interest rate on post office RDs being increased to 6.7% for the October-December quarter, it may be worth your time to check out the features of a recurring deposit at your nearest post office.
The post office RD is very similar to a systematic savings plan. You invest a certain sum every month for five years.
Banks usually give you the option to book RDs for tenures ranging from 6 months to 5 years. But the post office does not give you that flexibility as it only has the option to make a 5-year deposit. This means your money has to stay invested for a longer period in a post office RD.
Post office RD interest rate versus bank RD interest rates
A five-year post office RD has an interest rate of 6.7% in the October-December quarter. Only a handful of well-known private sector banks offer higher interest rates.
HDFC Bank and ICICI Bank offer an interest rate of 7% on RDs maturing in five years. ICICI Bank offers an interest rate of 6.9%. Canara Bank offers 6.75% and Bank of Baroda 6.75%. State Bank of India (SBI) and YES Bank offer 6.5% and Punjab National Bank 5.3% on a five-year RD.
Post office RD versus bank RD: Interest rates compared
|Interest rate (Oct-Dec quarter)
|5-year RD interest rates
|Bank of Baroda
|Indian Overseas Bank
|South Indian Bank
|Union Bank of India
|Karur Vysya Bank
|Punjab National Bank
|City Union Bank
|Bank of Maharashtra
|Bank of India
|Kotak Mahindra Bank
Interest on recurring deposits is compounded quarterly at banks and the post office. But before you go to your bank to start an RD, check how much it earns and compare it with the post office RD.
Post office RD versus bank RD: Who can open RD account?
You need to be a resident of India to open a recurring deposit in the post office. It can be opened as a joint account or on behalf of a minor. A minor above 10 years can open an account in the post office in his or her name.
A resident Indian can open an RD in any bank in India. Some banks may allow children to open a RD provided they have a guardian to handle the account.
Post office RD versus bank RD: Safety of RDs
The minimum investment limit is Rs 100 per month for a five-year RD in the post office. There is no upper limit. A post office RD hardly has any risk as it is backed by the Government of India.
Banks usually allow customers to open an RD with a minimum of Rs 100 per month. However, deposits at banks are protected only up to Rs 5 lakh per account holder because of a deposit insurance programme. This cover includes the principal and interest. So it is safer to open a bank RD in a way that the total return from it does not cross Rs 5 lakh in a year.
Post office RD premature withdrawal versus bank RD premature withdrawal
You can prematurely close your RD in a post office only after three years from the opening of the account. In such a case, you will get the interest applicable to a savings account in the post office.
If you are looking for liquidity, a post office RD of one year can be used to take a loan of up to 50% of the balance. However, this option can be exercised only once during the tenure of the RD. The loan can be repaid in a lump sum or equal monthly installments till maturity of the RD, along with interest, which is 2% more than the interest rate on the deposit.
Banks usually do not have a lock-in period for RD and so premature withdrawal is comparatively easier. However, a penalty will be deducted from the maturity amount for premature withdrawals.
Post office RD versus bank RD: Income tax on RD
There is no tax advantage on recurring deposits. Do note that the interest earned on maturity is treated as income from other sources when computing income tax. TDS is applicable as per the rules.
Post office RD versus bank RD: Where should you invest?
As far as investment safety is concerned, both post office and bank RDs are relatively safer. However, post office deposits have an edge as the entire deposit is backed by the government. Bank RDs have protection only up to Rs 5 lakh.
While the interest rates at post offices are slightly higher than that at most banks, look at factors like operational convenience and ease of dealing with the post office, says Dev Ashish, a SEBI Registered Investment Advisor (SEBI RIA), and Founder of StableInvestor.com.
One of the major limitations of opening post office term deposits online is that depositors must have an account with India Post, says Gaurav Aggarwal, Senior Director, Paisabazaar.
For senior citizens, bank RDs could be the better option as most banks usually offer an additional interest rate of 0.5% on senior citizen RDs.
Before opening an RD, compare the interest rates of banks and the post office. Do not blindly invest in a bank just because you have an account there.
But do note that the interest rates on small savings schemes are revised every month. So if you want to book an RD at 6.7% interest rate, do it by December 31. Banks also periodically revise their RD interest rates. A little inquiry can help you save some extra cash.