Even though the government slashed interest rates on post office schemes like the PPF and post office time deposits by up to 140 basis points (bps) two quarters ago (i.e., in April 2020), it has maintained status quo on rates for the past two quarters. On the other hand, banks have been relentlessly cutting FD rates for more than a year now because the Reserve Bank of India (RBI) has cut the repo rate by 250 bps (or 2.5 per cent) since January 2019.
The widening gap
After continuously cutting FD rates, the State Bank of India’s (SBI) one-year deposit now earns 4.90 per cent (pre-tax). HDFC Bank’s one-year FD is offering 5.10 per cent and ICICI Bank’s one-year FD is offering 5 per cent. The one-year post office time deposit is earning the investor an interest of 5.5 per cent pre-tax.
Let us look at the post-tax returns. Both the bank FD and the post office time deposit will be taxed depending on the tax regime one chooses and the tax slab they fall under.
Assuming an individual is in the highest tax bracket, i.e., of 30 per cent (including cess of 4 per cent), the post-tax return for SBI’s one-year FD is 3.37 per cent, and for the post office time deposit is 3.78 per cent.
In case of five-year fixed deposit, the interest rate differential is higher. Five-year post office deposit is offering 6.7 per cent whereas SBI’s five-year FD is offering 5.40 per cent. HDFC Bank’s five-year deposit is offering 5.30 per cent and ICICI Bank is offering 5.35 per cent.
These are the post-tax interest rates assuming tax slab of 30%: For SBI’s five-year FD it is 3.71 per cent and for a five-year post office time deposit it is 4.60 per cent.
Senior citizens should remember that banks offer 0.50 per cent higher interest rates for them as compared to the general fixed deposit interest rates. There is no such concession available on post office time deposits for senior citizens.
The effective interest rate for senior citizen bank FDs is as follows: SBI one-year FD is 5.40 per cent, HDFC Bank one-year FD is 5.60 per cent and ICICI Bank one-year FD is 5.50 per cent.
To cushion the impact of falling FD rates for senior citizens, banks have launched special FD schemes for such investors. These special FD schemes offer higher interest rate for a specific tenure over and above the 0.50 per cent.
For instance, SBI’s We Care deposit scheme offers 0.30 per cent over and above the existing interest rate, which is 6.2 per cent. Here the FD must be kept for five years. Similarly, HDFC Bank offers 0.25 per cent over and above the existing interest if a senior citizen invests for a minimum of five years and one day. ICICI Bank’s Golden Years FD offers 0.30 per cent for minimum tenure of five years and one day.
Here also, the five-year post office time deposit is offering higher interest rate than a bank FD:
- Post office time deposit: 6.7 per cent
- SBI We care FD: 6.20 per cent
- HDFC Bank Senior Citizen Care FD: 6.25 per cent
- ICICI Bank Golden Years FD: 6.30 per cent
What should investors do?
With this widening interest rate differential, what should fixed income investors do? Investors can consider options other than bank FDs as these are currently offering low rates of interest. However, keep in mind that bank FDs offer good liquidity (although often with a penalty). Similar level of liquidity is offered by very few other options (offering comparable safety) such as post office time deposits.
One option to consider is RBI’s Floating Rate Savings Bonds, 2020 (Taxable). These bonds are currently offering 7.15 per cent; with the first interest rate reset date due on January 1, 2021. However, liquidity of these bonds is extremely limited or negligible.
In case you are looking to invest in FDs for five years, an alternative for you is the National Savings Certificates (NSC). For the third quarter of the current fiscal, NSC is offering 6.8 per cent which is higher than the bank FD rates by at least one per cent.
For senior citizen investors, safety and returns play an important role while choosing an investment vehicle. For that, they can consider fixed income products like the Senior Citizen Savings Scheme (SCSS) and Pradhan Mantri Vaya Vandana Yojana (PMVVY). Both offer returns over 7 per cent a year.
Raj Khosla, Founder and Managing Director, MyMoneyMantra says, Deposit rates have been on the decline for some time and are unlikely to move up anytime soon. Returns and safety are key criteria for Senior Citizens when making deposits. SCSS and PMVVY are two schemes worth considering given better returns vs Bank FDs/Post Office schemes. Additionally, tax concessions are available to Senior Citizens which help improve the post tax return from deposits. Essentially, in today’s climate, I would recommend safety over returns.”