As the recent trends indicate, India’s domestic savings have witnessed a slowdown lately. To revive the savings and investment habits of households, the Government of India makes policy changes towards increasing interest rates on investments and deposits with financial
institutions. Lucrative post office FD interest rates make it one of the most preferred investment options for individuals.
The impact has been a marginal increase in gross domestic savings from FY17 to FY18.
- Gross domestic savings in FY18 stood at 30.5% as against 30.3% in FY17. Although a significant decline from the rate of gross domestic savings in FY12, the marginal increase paints a positive picture of saving habits in Indian households.
- Plus, the financial savings of households stood at 10.6% of GDP in FY18.
Trends for post office deposit schemes at a glance
As deposit schemes offered by financers are the primary source of wealth creation for investment household savings, the interest rates offered on them are of essential concern. Remarkably, post office deposit schemes like FD being a typical investment avenue for households has remained strong over time.
- Post office time deposits saw a steady increase from 2011 to 2018, with total deposits in FY2011-12 at Rs.3,607 billion growing to Rs.5,273 billion in FY 2017-18.
Now, take a look at the post office FD interest rates, one of the primary drivers of investment from households.
Interest rates on post office fixed deposit – An overlook
Post office FDs, also known as time deposits, are schemes that allow you to earn interest on a lump sum investment over a fixed tenor. Similar to FDs offered by various financial institutions, post office fixed deposits have periodic interest calculation and payout.
Individuals can invest in these schemes for a tenor of 1, 2, 3 or 5 years and earn interest at rates mentioned below.
I. Fixed deposit investment for 1 year – Interest payable at the rate of 6.9%.
II. Fixed deposit investment for 2 years – Interest payable at the rate of 6.9%.
III. Fixed deposits for 3 years – Interest payable at 6.9%.
IV. Fixed deposits for 5 years – Interest payable at the rate of 7.7%.
Post office FD interest rate is subject to change as per revisions made by the Government of India. The above rates are applicable from 1 st July 2019, as per the latest updates.
You can start a post office FD with a minimum investment limit of Rs.1,000, with no limit to the maximum investment amount.
Interest calculation and payout for post office FDs
Calculation of interest on post office fixed deposits is done quarterly and interest added to the account yearly. So, for a fixed deposit investment of 3 years, interest would be computed in the 4 quarters for each year up to 3 years.
You can check the interest added to your post office FD account at the end of every year by visiting your nearest post office branch. Note that interest calculation is done only on the deposited amount and not on the interest due for payment but not withdrawn.
Understand it with the help of an example.
Prema invests Rs.5 lakh in a 5-year post office fixed deposit, where interest is applicable at the rate of 7.7%. In the first year, quarterly interest calculation will be as follows.
Interest = P x r x n,
Whereby, P is the amount invested, r is the rate of interest, and n is the time.
Therefore, interest in the first quarter of the first year = 5,00,000 x 7.7/100 x 3/12 = Rs.9,625.
Interest for the first year will be Rs.9,625 x 4 = Rs.38,500. The total interest thus earned for 5 years will be Rs.38,500 x 5 = Rs.1,92,500.
The maturity amount at the end of 5 years is an addition of the amount invested and total interest earned, i.e., Rs.6,92,500.
Investors have an option to benefit from annual interest earned as per the applicable post office FD interest rate to his/her savings account. Withdrawal of the deposited amount will be at the tenor’s end.
However, individuals can also opt for premature withdrawal of their post office fixed deposit.
Premature withdrawal of post office fixed deposit – Applicable rules
- Premature withdrawal on post office fixed deposit is not allowed before 6 months of investment.
- For premature withdrawal and account closure initiated between 6 and 12 months from the date of investment, interest rates on savings account are applicable.
However, premature withdrawal of fixed deposits is not financially advisable.
India Post also offers Monthly Income Scheme (MIS) with post office FD interest rates applicable at 7.6% and monthly withdrawal of interest. The maximum deposit amount allowed for an MIS is Rs.4.5 lakh. Note that interest rates may be revised.
Alternatively, investors can opt for investment options like the Bajaj Finance Fixed Deposit that fetch assured higher returns. The investment option also comes with periodic payout options, available monthly, quarterly, half-yearly, and yearly.
Before investing in a fixed deposit scheme, make sure to compare the interest rates along with other accompanying features to maximise benefits. Use a fixed deposit calculator to compare returns and decide accordingly.