Post Office Savings: Are They Worth It?

When it comes to making investments, most people are attracted by the flashiness of the equity markets and mutual funds. What India Post has to offer is usually ignored. The article takes a deeper look at the various postal savings schemes and compares the risk-adjusted returns to conclude if they are good enough for investors.

The prime objective of any investor is to get the best risk-adjusted return on his or her investment. In fact, all investors keep searching for such opportunities. Nevertheless, very few, and especially millennial investors, do not even consider or know that the Indian Post Office also offers various investment opportunities. Consider the fact that the best return provided by traditional post office saving schemes currently is 6.7 per cent through its five-year time deposit offer. Compare this with the fixed deposit rate of 5.3 per cent offered by India’s largest lender, the State Bank of India (SBI), for the same duration. Even the mutual fund category of similar duration i.e. medium to long duration fund has generated annualised return of 6.05 per cent for the last five years.

This clearly shows that as of now the rate of return offered by instruments from the Indian Post Office is the best. The most beneficial part is that all the post office investment schemes are tax-exempted under Section 80 C i.e. tax exemption of up to Rs1,50,000 is allowed. In a post office saving scheme, your principal and interest are both secured. Your risk on investment is negligible and the returns are also good. These are government-guaranteed schemes and therefore offer the highest security.

Categories of Savings Schemes
Currently there are nine postal saving schemes available for investment by the general public in India, as described below:

Post Office Monthly Income Scheme : This scheme allows you to invest a maximum of Rs4.5 lakhs individually and Rs9 lakhs jointly. As an MIS plan, it allows investors to generate a steady monthly income. The minimum investment required to be made is Rs1,000. Currently the interest rate offered is 6.6 per cent per annum, which is payable monthly. Interest is payable on the completion of a month from the date of opening and so on till maturity. And if interest payable every month is not claimed by the account holder, such interest does not earn any additional interest. All such interest amounts received are taxable.

Post Office Savings Account : You can also open a savings account with the post office which is similar to a savings account opened with banks by depositing a minimum of Rs20. Also, you must maintain the account with a minimum of Rs50. India Post also allows you to transfer money in your post office savings account online. It offers 4 per cent per annum on individual and joint accounts. Most of the banks are currently giving interest of less than 3 per cent on a savings bank account. For example, SBI’s savings account interest rate is 2.7 per cent. Interest is calculated on the basis of minimum balance between the 10th of the month and end of the month and allowed in whole rupees only.

Five-Year Post Office Recurring Deposit Account (RD) : With small monthly investments, you can opt for as many RD accounts as you want with a post office. These investment options allow you to make periodic deposits while enabling substantial corpus creation over the tenure of the investment. The rate of return offered by this account is 5.8 per cent per annum. This interest is quarterly compounded. The RD rate offered by the post office is better than the most of the banks that currently offer around 5.4 per cent for duration of 5-10 years of RD.

Post Office Time Deposit Account (TD) : You can also open time deposits as a post office saving scheme for one, two, three and five years’ tenure. The current interest rate offered is 5.5 per cent for one to three years while for five years it is 6.7 per cent. We have already compared this rate which looks better than most of the instruments available for investment with similar duration.

Senior Citizen Savings Scheme (SCSS) : India Post also offers Senior Citizen Savings Scheme (SCSS) to investors who are 60 years old or 55 years old in case of voluntary retirement subject to the condition that investments will be made within one month of receipt of retirement benefits. They can deposit up to Rs15 lakhs over their lifetime in a SCSS to earn regular interest income. The plan also comes with a lock-in period of five years. Interest is payable on a quarterly basis and applicable from the date of deposit to the end of the quarter. Interest is taxable if the total interest in all SCSS accounts exceeds Rs50,000 in a financial year and TDS at the prescribed rate is deducted from the total interest paid. No TDS is deducted if Form 15 G or 15H is submitted and accrued interest is not above the prescribed limit. The rate of return offered is 7.4 per cent.

Public Provident Fund Account (PPF) : PPF is one of the preferable schemes and is available with a lock-in period of 15 years. Besides a bank, PPF can also be opened with a post office. Nevertheless, only one account can be opened all across the country either through the post office or any bank. It has slightly longer lock-in but investors can avail partial withdrawal after five years. A minimum deposit of Rs500 per year is required to keep the account active. Interest rate is applicable as notified by the Ministry of Finance on a quarterly basis, which currently stands at 7.1 per cent.

Sukanya Samriddhi Account (SSY) : If an investor wants to plan for his or her daughter’s future, he can open a Sukanya Samriddhi Account with the post office. Under this scheme, parents or legal guardians of any girl child up to 10 years of age are eligible to open this account in the child’s name. A maximum of two accounts is allowed for a household for two daughters individually. Once the child reaches 21 years of age, she is eligible to claim the maturity amount. Maturity of the account also differs as per the girl child’s age on the date of enrolment. Deposit can be made maximum up to completion of 15 years from the date of opening.

Thus, with a limit of up to 10 years of age, the maturity term will be accordingly extended from 21 years of age. For example, if the child was five years old on the date of enrolment, the year of maturity will be 21 years + 5 years i.e. 26 years. The current rate of interest offered is 7.6 per cent and interest is calculated for the calendar month on the lowest balance in the account between the close of the fifth day and the end of the month. The interest amount is credited to the account at the end of each financial year.

National Savings Certificate (NSC) : You can also invest in NSC with a small deposit amount of Rs100 as a single individual, jointly or as the guardian of a minor. The lock-in period for this scheme is five years. Also, the annual interest on NSCs is re-invested and paid out as an accumulated amount at the time of maturity. From the start of financial year 2020-21, the interest rate offered in this instrument is 6.8 percent, which is compounded annually. However, the entire amount is payable at maturity. So, every Rs1,000 invested will grow to Rs1,389.50 after five years.

The following table gives you a glimpse of the interest rate offered by various post office schemes:

KisanVikas Patra (KVP) : KVP certificates allow you to earn double the deposit amount in 10 years and four months – 6.9 per cent interest compounded annually. The deposit matures as per the maturity period prescribed by the Ministry of Finance from time to time as applicable on the date of deposit. Also, the deposit can be enchased only after two years and six months against the payment of a nominal penalty.

To Invest or Not 

The Government of India has not altered much in the interest rate offered by small savings schemes even during the pandemic. An attempt to lower the interest rate offered by such instruments was immediately taken back. In the current low rate environment, these instruments offer a better rate of return. A conservative investor can do his entire financial planning through the products offered by the post office. He can do his retirement planning through PPF, his daughter’s higher education or marriage through Sukanya Samriddhi Account and short-term goals through other schemes. He can use NSC judiciously to plan his tax. Nevertheless, mutual funds offer better returns in the long run but investors have to face volatility. Therefore, if you are a conservative investor who wants more predictability in returns albeit even if it means lower returns, you should opt for the products offered by India Post to fulfil your financial goals.

"You get recessions, you have stock market declines. If you don't understand that's going to happen, then you're not ready, you won't do well in the markets"

-Peter Lynch