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Saturday, October 3, 2020

Small saving plans offer 6.7% interest which beat bank FD rate

The finance ministry’s move to keep small savings rates unchanged for the quarter to December even as banks have slashed deposit rates has not only made the small savings schemes more attractive but will also allow the government to raise more funds through this route.

A one-year fixed deposit (FD) with State Bank of India now fetches 4.9%. Similar deposits in HDFC Bank and ICICI Bank fetch 5.1% and 5%, respectively. In comparison, one-year deposits with the post office, which are considered part of small savings schemes, yields 5.5%.

The gap between bank FDs and post office FDs is wider in the five-year bucket. Here, SBI offers 5.4%, HDFC Bank 5.5% and ICICI Bank 5.5%. That compares with 6.7% on a post office five-year deposit and 6.8% on a five-year National Savings Certificate.

The widening gap between bank deposit rates and interest rates offered by small savings schemes is expected to draw more savers to the schemes.

“If your bank FDs are close to maturity, you can gain higher returns by making the new FD at the post office. Post office FDs are guaranteed by the government. The tax treatment is also the same as bank FDs. However, you may not get the same level of convenience such as net banking and bill payment services for post office accounts," said Amol Joshi, founder, Plan Rupee Investment Services.

Premature termination of a post office fixed deposit is also tougher.

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