The post office offers several types of deposit schemes for the investors. They are also known as small saving schemes. These schemes are backed by the central government. Some of these schemes offer tax exemption benefits under the section 80C of the Income-Tax Act. The interest rates on these schemes are reviewed and fixed every quarter by the central government. The post office term deposit is mostly similar to a bank fixed deposit where you invest money for a fixed time period and earn guaranteed returns throughout the tenure of the deposit. And, at the end of the tenure the maturity amount comprises the principal amount and the interest earned. If you want to go for a low-risk investment with guaranteed returns then you might consider this option. The features of a Post Office Term Deposit are listed below:
- ELIGIBILITY :
Any indian resident, preferably with a post office savings bank account is eligible to invest in a Post Office Term Deposit. A minor of ten years or above can also invest in it. An adult guardian can also open this type of account on behalf of the minor who is below ten years of age.
- INVESTMENT CONDITIONS:
A minimum amount of Rs 200 is required to be deposited to open this account. There is no such limit on the maximum amount.
- INTEREST RATE:
The interest rate of a Post Office Term Deposit is set by the government at the start of each quarter in a financial year. Interest is payable annually but is calculated quarterly. The interest rate varies from 5.5 per cent to 6.7 percent depending on the tenure of the deposit.
Post Office Term Deposit schemes have a minimum tenure of one year and maximum tenure of five years. The tenure can also be extended at the time of maturity.
- NOMINATION FACILITY :
Post Office Term Deposit scheme provides nomination facility. The nomination facility enables the nomination of an individual who can claim the contents of the deposit after the death of the original depositor.
The interest rate on the Post Office Term Deposit is guaranteed for the tenure one opts for. The interest rates are notified every quarter by the government and are aligned with the G-sec rates of similar maturity with a spread of 0.25 per cent. But the rates will remain the same for the entire term of a deposit after one has made an investment.
- LIQUIDITY :
A Post Office Term Deposit is liquid despite the deposit tenure. Also, the investor can borrow against the deposit or can withdraw the deposit before the maturity period.
- PREMATURE WITHDRAWAL:
It is allowed to withdraw the funds before the maturity period after completion of six months of the initiation of the deposit. Withdrawal after six months but before the completion of one year will reduce the interest rate to 4 per cent. Withdrawal after one year earns one percent less interest than what the deposit for that specific tenure earns.
- TAX CONNOTATIONS:
There are no tax benefits on the deposits which are less than five years tenure. The five year deposit is eligible for income tax deduction on the principal amount under the section 80C. The interest earned is taxable.
You can open the account at any head or general post office. Post office savings account holders with internet banking facility can open the account online. Or you can open the account offline by submitting the proper documentation. You will need a pay-in slip for the first deposit opening sum to be credited into your account. Payment can be made through cash or cheque. But if you have an internet banking facility it can be used to make the payment. The account is portable between post offices. After opening the Post Office Term Deposit account, you will be given a pass book. The rules applicable to the account will be stated there.
As the scheme is backed by the Government of India, the principal amount in the Post Office Term Deposit is completely protected. But it is not inflation protected which means that the returns from these deposits are affected by the inflation rates. When the inflation rate is above the rate of returns it earns no real returns. However, if the rate of inflation is lower than the rate of returns earned, then it gives a positive rate of return. So, instead of depositing a lump sum amount in a single deposit, one should split the deposit across various tenures. In this way, in case of any premature withdrawal, only a few deposits will lose interest. Also, the deposits over various tenures can create various income sources for your financial goals over the time. Also, if you don’t wish to withdraw the annual interests then you can instruct the post office to transfer it to a post office savings account or a recurring deposit account. It is totally risk-free and hence a good investment option for your retirement period.