Post office time deposits: Safe option with higher interest rates

With the Government raising interest rates on select small-saving schemes by up to 110 basis points, the age-old post office time deposits shall fetch 6.6-7 per cent per annum, from January 1. This sweetens the attractiveness of this traditional savings option, a go-to investment for many a middle-income family. For risk-averse investors who do not mind the additional legwork and paperwork that such small savings schemes may bring along with risk-free guaranteed returns, PO time deposits (also known as national savings time deposit account) deserve good consideration. Here is a lowdown.

Safety, rates

The Post Office Time Deposit (POTD) is an investment savings account scheme offered by the India Post (Department of Posts). It is similar to FD facility offered by banks. One-year time deposits earn 6.6 per cent, 6.8 per cent for two-year tenure, 6.9 per cent for three years and 7 per cent for five-year duration. Apart from guaranteeing return on investment, POTD has full government backing, which makes it the safest product. This makes the entire amount in POTD 100 per cent secure, as against deposit insurance for bank FDs that covers up to ₹5 lakh.

Since 2016, interest rate resetting in small-saving schemes is to be done based on yields of government securities of the corresponding maturity with some spread on the scheme for senior citizens. In practice, the interest rate changes are made considering several other factors, including political ones.

For POTD, interest is payable annually but is calculated quarterly. The interest rates mentioned earlier pertain to January-March 2023 quarter. Do note that there is no cumulative option available in POTD, unlike many FDs and bonds. Also, there is no additional interest for senior citizens unlike in competing products.

However, the tax deducted at source (TDS) for POTD is a grey area. If the interest earned crosses a certain threshold, TDS comes into play. TDS on bank FD interest is a pain point, especially when the depositor does not fall under tax bracket. The paperwork to ensure TDS is not deducted at bank FD level or the convoluted TDS refund post ITR filing does not enthuse many.

Better interest rates than banks

POTD or National Savings Time Deposit Account is similar to a bank fixed deposit, but there are a few elemental differences. On the interest rate parameter, POTD scores over PSU banks (5.5-6 per cent) in their less than one-year tenure, but POTD lags a little against select PSU lenders (in the 1-2 years, 2-3 years. In the 3-5 years bucket, POTD interest rate is well ahead of most big PSU banks. Of course, many private sector banks and small finance banks offer better rates than POTD.

POTD interest is payable at the end of a year, compared to monthly, quarterly, or yearly for bank FDs. In terms of loan against deposit, POTD may be pledged or transferred as security to a set of entities, compared to much easier norms when it comes to pledging bank FDs. In terms of premature liquidity factor too, POTD is comparatively restrictive as deposit can’t be withdrawn before the expiry of six months.

Process, limits, hassles

POTD can be opened by a single adult, joint account (up to three adults), (iii) a guardian on behalf of minor/person of unsound mind or a by minor above 10 years in her/his own name. Importantly, any number of accounts can be opened. To open a POTD account, you need minimum of ₹1,000 but here’s more good news: there is no maximum limit for investment. In many other small saving schemes such as PPF, Sukanya, SCSS or MIS, there are upper caps.

The annual interest in a POTD may be credited to the savings account of the account holder by submitting application. The offline hassles can wear down many a spirited depositor, given the nature of a post office environment vis-a-vis the plush office and eager staff at banks, especially private-sector ones. The paperwork and queues can put off many, even though POTD remains a solid opportunity.

You can, of course, open a POTD account online but then some prerequisites must be met, such as an active mobile number and email ID, a savings bank account, valid KYC documents, and PAN. Contributions can also be made via India Post Mobile Banking app. The online interface can help, especially when POTD depositor changes locations, cities, etc. For transfer of accounts offline, the IndiaPost website says, the depositor should apply in the prescribed form [SB10(b)] or go for manual application. The application can be given either in transferring office or transferee office.

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