Bank deposits versus post office savings

Everyone says interest rates are rising. This is true even for deposit rates. So does that mean bank deposits could now be a better option to post office savings?

Here is a bird's eye view of recurring and fixed deposits offered by banks and post-office.

Post office Recurring Deposits VS Bank Recurring Deposits

A post office recurring deposit account (RDA) is similar to a recurring deposit in a bank, where you can invest a fixed amount on a monthly basis. The postal RDA has a fixed tenure of five years.

These deposits accumulate money at an annual fixed rate of interest of 8 per cent. The interest is compounded on a quarterly basis. The minimum investment in a post office RDA is Rs 10 and there is no prescribed upper limit. For example, if you invest Rs 100 every month in 60 instalments, you will earn a sum of Rs 7,289 after 5 years.

Banks, however, offer a flexible time period on their recurring deposits. You can open an RDA for a minimum period of 6 months, and thereafter in multiples of 3 months up to a maximum period of 10 years.

In banks, you can start a recurring deposit with State Bank of India for a monthly instalment of Rs 100 whereas ICICI Bank has kept its minimum deposit limit at Rs 500.

An individual can open an RDA account with a post office individually or one in a joint form with another investor, or a guardian on behalf of the minor who has attained the age of 10 years can open an RDA account in his/her own name.

The advantage with post-office deposits is that it offers a fixed rate of return for the duration of the deposit, while banks constantly review their recurring deposit rates.

However, the disadvantage with post office savings is that that in the age of convenience banking, you will have to visit the post office every month. In case of banks, the amount is automatically debited from your account. Premature withdrawal, however, cannot earn you desired returns.

In post office RDA, you can withdraw up to half the balance. On premature closure of the account (after one year), interest is payable as per the rate for the Post Office Savings Bank Account, which is 3.5 per cent.

In the case of banks, premature closure of an RDA will attract a penal interest. This means the depositor will get interest around 1 per cent less than the prevailing rate. It will certainly be higher than the 3.5 per cent paid by post office.

Post office Time deposits vs Banks' Fixed Deposits

Just like banks' fixed deposits (FDs), post office time deposits are meant for those investors who want to deposit a lump sum for a fixed period.

Time Deposits are of 1 year, 2 year, 3 year and 5 year tenures. The minimum investment should be Rs 200 and its multiples. The tenure of bank fixed deposits are flexible, with periods ranging from 15 days to 10 years but the minimum amount is as high as Rs 10,000.

In case of postal time deposits, the account can be closed after 6 months but before one year of opening the account. On such closure, the amount invested is returned without interest. If a time deposit of two or three years is withdrawn prematurely, post office will pay interest only for the completed year or years.

For example, a fixed deposit for two years is withdrawn after 20 months, interest will be paid only for the one full year completed. The depositor will lose interest for the remaining 8 months.

If a bank FD is closed before completing the original term of the deposit, banks have the discretion to charge penal interest. If a bank decides to charge penal interest, the depositor will be paid interest at a lower rate than that was contracted.

A postal time deposit fetches annual interest rates in the range of 6.25 to 7.5 per cent. A bank FD offers annual interest rates in the range of 3.75 per cent to 7.27 per cent. Senior citizens enjoy the privilege of earning higher interest rates on bank FDs, ranging from 4.25 per cent and 7.95 per cent.

In the post-office scheme your investment grows at a pre-determined rate with no risk as it is backed by the government.