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Home >Money >Personal Finance >Special FDs or high interest savings account: What's better for senior citizen?

Interest rates in India are around a decade low. This has resulted in a tough situation for people, especially senior citizens, who generally park their retirement corpus on fixed income instruments such as fixed deposits (FDs). They face reinvestment risk as they may have to park their money in FDs offering lower rates when they come up for renewal. To provide alternative to such senior citizens, some of the banks have launched special fixed deposits which offer 30-80 basis points higher than normal fixed deposit rates.

However, the interest rates offered by these FDs are in the range of 6.20% to 6.30%, while there are banks, including IDFC First, which are offering a higher interest rate of 7% on their savings account.

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Money kept in savings accounts doesn’t have any lock-in and also doesn’t have any penalty in case of withdrawal. Therefore, should senior citizens go for these special FDs which generally have a lock-in and penalty on premature withdrawal or park these in savings bank accounts offering higher rates of interest?

At present, State Bank of India (SBI) gives 5.4% interest rate on five-year FD for the general public. If a senior citizen puts a fixed deposit under the special FD scheme, then the interest rate applicable to the FD will be 6.20%.

ICICI Bank's special FD scheme for senior citizens is called ICICI Bank Golden Years. The bank offers 80 bps higher interest rate on these deposits. ICICI Bank Golden Years FD scheme offers senior citizens an interest rate of 6.30% per annum. 6.30%. HDFC Bank special FD scheme for senior citizens is called HDFC Senior Citizen Care. The bank offers a 75 bps higher interest rate on these deposits. If a senior citizen puts a fixed deposit under HDFC Bank Senior Citizen Care FD, then the interest rate applicable to the FD will be 6.25%. The tenor for these FDs is generally starts from 5 years.

There are premature withdrawal penalties in the range of 1-1.5% on these FDs. These FDs are available only till 31 March as of now.

However, IDFC First Bank is offering an interest rate of up to 7% on their savings account. The monthly average balance requirement is only 25,000. This interest is available if balance is available up to 1 crore. After that the interest rate goes down.

Experts believe that one shouldn’t lock in their entire money in special FDs given the long tenor of 5 years. They can diversify across products available in the market.

“The first investment for a senior citizen is the Senior Citizen Saving Scheme (SCSS). 15 lakhs should first be invested in this. If the spouse is also a senior citizen, then the same should be repeated," said Sriram Jayaram, a SEBI registered investment planner. Senior citizens savings scheme is offering an interest of 7.4% and has a lock-in of five years. The interest is revised on a quarterly basis in case of SCSS.

If the investment amount is higher than the limit one can invest a portion of the money in special FDs and high interest rate savings account.

“However, while parking the money in savings account one should remember that the bank can change the interest rate without any prior notice. While in case of special FDs the interest rate will remain fixed for the entire tenor of the FD," said Jayaram.

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