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Thursday, June 24, 2021

Bank FDs vs Small savings schemes: Which are better investment options?

Bank Fixed deposits (FDs) vs Small savings schemes: What should be your investment choice between bank FDs and small savings schemes? Let’s find out.

Written by Adhil Shetty |
Updated: May 27, 2021 4:19:52 pm
Bank FDs vs Small savings schemes: While fixed deposits are offered by all the banks in the country, small savings schemes are operated by the Union government and are available in multiple variants. (Representative image: Pixabay)

Bank fixed deposits and small savings schemes are some of the most popular low-risk investment options in our country, particularly among risk-averse investors. When investing in a low-risk investment instrument, investors usually look for features like the safety of the fund, returns potential, the minimum and maximum size of investment allowed, tax benefits, liquidity, and tenure options. While fixed deposits are offered by all the banks in the country, small savings schemes are operated by the Union government and are available in multiple variants including the Public Provident Fund, Post Office Time Deposits, National Savings Scheme, National Savings Certificate, Kisan Vikas Patra, Sukanya Samriddhi Yojana, Senior Citizens Savings Scheme, etc. with varying terms and conditions and investment objectives.

But what should be your investment choice between bank FDs and small savings schemes? Let’s find out.

Safety of investment

Bank FDs and small savings schemes both offer safety of funds to their investors. Banks are known to provide moderate returns on deposits along with high capital safety. Deposits with stable, well-capitalised banks are highly safe. Investments in small savings schemes are also highly safe because of the sovereign guarantee of the government of India. They are therefore almost risk-free.

Interest rates

Post office time deposits are currently offering interest rates in the range of 5.50 per cent p.a. to 6.70 per cent p.a. for 1 year to 5 years’ tenures. The NSC and the SCSS, which have a maturity period of 5 years, are currently offering 6.80 per cent and 7.40 per cent p.a. respectively. On the other hand, most bank FDs for non-senior-citizen depositors amounting to less than Rs 1 crore are currently offering interest rates in the range of 4.25 per cent to 6.50 per cent p.a. while a few private and small finance banks are offering slightly higher rates up to 7.25 per cent p.a. for tenures between 1 to 5 years.

Small savings schemes with more than five years’ maturity periods such as PPF, Sukanya Samriddhi Yojana, and KVP (which comes with a maturity period of 124 months) are currently offering 7.10 per cent, 7.60 per cent, and 6.90 per cent p.a., respectively. But most bank FDs with a maturity of more than 5 years are offering interest in the range of 4.80 per cent to 6.50 per cent p.a.

So, small savings schemes offer a better interest rate than bank FDs in most cases. However, banks allow investment options with more flexibility in the choice of tenures, and they also allow investments for ultra-short tenures ranging between 7 days to 1 year. Also, senior citizen FD investors usually get preferential rates up to 50 basis points over and above the applicable normal rates.

Liquidity and loan facility

Most small saving schemes come with a lock-in stipulation except post office time deposits. On the other hand, bank FDs allow premature partial or complete withdrawal benefits that can be availed after losing a small portion of the interest income as penalty. So, bank FDs usually offer greater liquidity compared to the small savings schemes with the exception of tax-saving FDs that come with a mandatory lock-in period of 5 years.

And as far as borrowing facility is concerned, both bank FDs and small savings schemes can be used as a pledge to get a loan subject to terms and conditions.

Fixed returns throughout investment tenure

As the name suggests, fixed deposit schemes of banks allow investors to get the same interest rate throughout the investment period, which is set when initiating the deposit. Small savings schemes like post office time deposits, NSC, and KVP also allow the same interest rate throughout the investment period. However, interest in schemes like PPF and SSY keep changing for existing and new investments whenever there is a change in interest rate by the government. The interest rates on small savings schemes are revised every quarter.

Tax benefits

Tax-saver bank FDs allow tax deduction benefit up to Rs 1.5 lakh under Section 80C of the I-T Act; however, they don’t allow premature withdrawals, loans, or overdrafts against them. Small savings schemes like PPF and NSC also allow tax benefits u/s 80C to their investors who can also get a loan against them subject to fulfilment of conditions. But normal bank FDs do not come with any tax deduction benefits. Plus, their interest income is taxed according to the slab rate applicable to the investor. However, while the interest income from small savings schemes like PPF and SSY are tax-exempt, NSC, KVP and five-year post office time deposit returns are taxable.

Riders on investment amount

There is an upper limit on maximum investment into small saving schemes like PPF and SSY. You can’t invest more than Rs 1.5 lakh in a financial year in them. In NSC, you can invest more than Rs 1.5 lakh, but the tax benefit is not available on the excess amount. The total investment threshold is Rs 15 lakh in SCSS. However, there is no upper limit when you invest in a bank FD or a post office fixed deposit scheme.

Final thoughts

Small savings schemes come in multiple variants including some that may not be suitable for every investor. For example, only parents with young daughters are eligible for SSY while resident individuals above the age of 60 can invest in SCSS. However, schemes like PPF and SSY usually offer higher interest rates than prevailing bank FD rates and their returns are highly tax-efficient as well. But they do have long lock-in requirements and restrictions on investment amount. Bank FDs, on the other hand, are highly liquid and there’s no ceiling on maximum investment amount, but their post-tax returns are much lower. So, you must carefully evaluate your financial goals and invest, in a diversified manner, in instruments that are aligned with your returns expectations, risk appetite and liquidity requirements.

 

The author is CEO at BankBazaar.com. Views expressed are that of the author.

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