FDs vs small savings schemes: Which one should you choose and why?

For conservative investors, there are multiple financial instruments to go for. Some of these include Public Provident Fund (PPF), National Savings Certificate (NSC), Kisan Vikas Patra (KVP) and Senior Citizens Savings Scheme (SCSS). Most of these schemes give an interest in the range of 6.9% to 7.5% per annum. Notably, the government has kept the interest rates for small savings schemes unchanged in the March quarter.

Apart from small savings schemes, one of the most popular investment options for retail investors is the fixed deposit (FD). Read on to know more about the interest rates offered by different banks on their term deposits.

Many may be confused about whether to invest in a fixed deposit or in a small savings scheme. Each has its own set of advantages. It is recommended to consider the following factors before you choose one over the other.

FDs vs small savings schemes: How to decide?

I. Rate of interest: It goes without saying that investment in any scheme – conservative or aggressive – is meant to earn returns. The higher the interest, the better it is. Most banks offer an annual FD interest rate in the range of 6.25% to 6.40%. Whereas small savings schemes offer interest rates in the range of 6.7% to 7.5% (see table below)

II. Lock-in period: Although small savings schemes offer higher interest than fixed deposits, they typically have a lock-in period. NSC has a lock-in period of five years and PPF has a 15-year lock-in period.

(Source: indiapost.gov.in)

III. Income tax (I-T): Interest on fixed deposits is taxable at the slab rate, whereas interest income on small savings schemes is tax-free. Although investment in these schemes (such as NSC and PPF) is no longer allowed as a deduction in the old tax regime, the interest income is not taxable.

IV. Blend two or more options: Experts recommend curating a portfolio that comprises different investment options, including FDs and small savings schemes. Typically, investment in these schemes (PPF/NSC and FD) takes care of the portion of the portfolio that is invested in debt. Therefore, both of these investments serve the same purpose.

"PPF is a long-term wealth creation product that offers a sovereign guarantee and tax-free return as a debt portfolio for your long-term goal. NSC is also a good product that offers a sovereign guarantee for principal and interest that can be used for mid-term goals at smaller tax rates. And FDs are among the most suitable products for your short-term goals, which are in having an investment horizon of up to 2/3 years. So, all three products can be used for your different financial goals as part of your debt portfolio,” says Preeti Zende, founder of Apna Dhan Financial Services.

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