Should seniors go for special FD rates offered by some banks?

In May last year, a few banks came up with special rates on certain long-tenure fixed deposits for senior citizens, in a bid to protect them from the blow of falling interest rates. Under the SBI Wecare Deposit, ICICI Bank Golden Years FD and HDFC Bank’s Senior Citizen Care FD schemes, the banks offer an extra 25-30 basis points (bps) interest on deposits with tenures of 5 years and above. This is over and above the 50 bps higher interest usually offered to senior citizens. The special FD rates apply on fresh deposits as well as renewals.

The closing date for investments in these schemes (of above mentioned banks only) has been extended to March 31, 2021.

The additional 25-30 bps interest offered over and above the usual senior citizens rates might have caught your attention. But we do not recommend locking in sums for such long periods. Besides, the current rates on these FD schemes are not attractive enough. Other private banks offer senior citizens better rates for even shorter tenures (up to two years). And, given that we are at a bottom in the interest rate cycle, shorter tenures are better now.

How they fare on rates

After the recent revision in rates, SBI Wecare offers 6.2 per cent interest per annum on deposits of less than ₹2 crore with tenures of five years and above.

Senior Citizen Care FD of HDFC Bank gives a tad higher rate of 6.25 per cent on deposits of less than ₹5 crore with tenures between five years and one day and 10 years.

For a similar tenure, ICICI Bank Golden Years FD offers 6.3 per cent on deposits under ₹2 crore.

While most public sector banks offer up to 6.1 per cent for senior citizens currently, the interest offered by some private banks go up to 7.45 per cent for a similar tenure. Small finance banks offer 7.5-8 per cent.

Another option available is the Post Office Senior Citizen Savings Scheme (SCSS) that pays 7.4 per cent per annum for a maturity period of five years.

Besides its implicit government backing, SCSS scores over bank FDs, given the tax benefit upon investment, under section 80C of the Income Tax Act (available only if you opt for the old regime tax rates).

However, interest under the SCSS is paid on a quarterly basis only, while banks generally offer investors the option to choose from monthly/quarterly payouts or cumulative payout at the time of maturity.

Should you go for it?

The prevailing interest rates in the country are close to bottoming out and may remain at these levels till the economy recovers.

At the same time, the rate cycle cannot persist at the current levels for a long period, given the elevated inflation and signs of green shoots in the economy.

Hence, locking your deposit into a tenure of more than five years now, that too at relatively lower rates, may not be a wise decision.

This is because you can lose out the opportunity to reinvest at higher rates once interest rates begin to inch up.

It makes sense to opt for shorter-term deposits of up to two years.

For a tenure of up to two years, SBI offers senior citizens up to 5.6 per cent interest, while HDFC Bank and ICICI Bank offer up to 4.25 per cent only. Other private banks (such as DCB Bank) offer up to 7.2 per cent.