Tuesday, May 24, 2011

Don’t bank on post office

Dear Comrades,

With the Reserve Bank of India increasing its policy rates aggressively in the last one-and-half years, banks have increased their deposit rates over all maturities by over 150-200 basis points. Banks are now aggressively marketing their shorter time deposits and even savings bank account deposits will now earn 50 basis points more in interest.

For small savings, the various instruments offered by India Post have been a preferred investment avenue. The Department of Posts operates the post office savings schemes and is one of the largest and oldest banking service institution in the country. It offers schemes like savings account, recurring deposits, time deposits, provident fund schemes, monthly income schemes (MIS), National Savings Certificates (NSCs)and Kisan Vikas Patras (KVPs). However, the rates they offer have remained stagnant for some time and have not been revised with the increase in policy rates by the central bank and no longer provide safeguards against a rising inflation rate.

The post office savings bank account offers an interest rate of 3.5% per annum on individual and joint account, and there is no fixed tenure. However, unlike banks, the maximum amount an individual can put in a post office savings bank account is R1 lakh, and R2 lakh in a joint account.

The interest earned from the deposit is tax free under section 80 L of the Income Tax Act. For senior citizens' savings schemes, the post office offers 9% interest rate paid every quarter. The minimum age of opening the account is 60 years or 55 years in case the person has retired under the superannuation scheme. The account holder will have to pay a penalty of 1.5% if it is closed after one year and 1% if the account is closed after two years. The account holder will have to pay tax deducted at source (TDS) if the annual interest earned is over R10,000.

NSCs offered by the post office are government guaranteed and is a tax savings option for the investor. The interest is compounded and is returned along with the principal amount on maturity after six years. The minimum amount that can be invested in NSCs is R100 and one can buy certificates in denominations of R500, R1,000, R5,000 and R10,000. Moreover, there is no limit for investment in this instrument. So if an investor puts in R10,000, he will receive R16,010 after six years.

An investor can avail tax deduction under Section 80 C of up to R1 lakh and the annual interest earned is deemed to be reinvested and thus qualifies for deduction under Section 80 C. However, premature encashment is not allowed, though loans can be availed against the security of the certificate. An investor can transfer the certificates from one post office to another and duplicate certificates are issued in case they are lost or stolen. For security, post offices now paste the photograph of the investor on every certificate.

KVPs, which double the money invested in eight years and seven months, give an effective interest rate of 8.41%. An investor can buy KVPs in denominations of R100 and multiples of R100. Here too, there is no limit, but there is no tax benefit to the investor either. In case of premature encashment within a year of purchase of the certificates, the investor gets only the face value of the certificate, and no interest is paid. In case of premature withdrawal before two years and six months, the the face value and simple interest is paid.

The MIS is one of the popular investment instruments for those seeking a regular income flow every month. On a single account, one an invest up to R4.5 lakh and up to R9 lakh in the case of a joint account and it gives a return of of 8% plus a bonus of 5% on maturity. However, the bonus is not paid where the amount is withdrawn before maturity.

For those who want to invest the monthly interest income, one can open a recurring deposit account for five years, which will give an interest of 7.5% compounded quarterly. One can give instructions to the post office to automatically transfer the interest income of the MIS to the post office savings bank account and then to recurring deposit, which will get an effective interest of around 10.5%.

The Financial Express
Saikat Neogi, Posted: Tuesday, May 24, 2011 at 0241 hrs IST
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