The finance ministry has revised the interest rates for small savings schemes for the financial year 2014-15. The only change was in the post office time deposit rates. The new rates will come into effect from 1 April 2014. The interest rate of National Savings Certificate and Public Provident Fund were left unchanged.

The changes

The interest rate on post office time deposits across maturities has been revised by 10-20 basis points. The interest rate on fixed deposits for one year and two years has been increased from 8.20% to 8.40%; for three-year time deposit it has been increased from 8.30% to 8.40%; and from 8.40% to 8.50% for five years.

Besides this, five-year recurring deposits will fetch you an interest rate of 8.40% as against 8.30% earlier.

What is time deposit?

Post office time deposit is a fixed deposit where you put your money for a fixed tenor. The interest is compounded quarterly and paid annually. Any individual can open a post office time deposit account. You can also open a joint account, or one in a minor child’s name.

In terms of tenor, there are four choices: one year, two years, three years and five years.

In case of premature withdrawal of a one-year time deposit, after six months but before the expiry of one year from the date of deposit, simple interest will be applicable. For the others, if deposit is withdrawn after one year from the date of deposit, interest will be calculated 1% less than the rate specified for the period.

The minimum deposit that you can make is 200. There is no maximum limit.

Tax Implications

Investments in a five-year post office fixed deposit qualifies for section 80C benefit of the Income-tax Act. Remember that five-year fixed deposit contributions enjoy a tax deduction. However, the interest that you earn is taxable. So, if you are in the highest tax bracket of 30.90%, your effective yield is just 5.87%.

What should you do?

Let’s compare these returns to a bank fixed deposit (FD). Currently, five-year bank FDs that qualify for section 80C benefits are better as they give a higher return of around 9.25%, versus 8.50% that a post office term deposit gives. Also, if you look at the interest rates for other tenors, banks are giving a better offer than post offices.

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