Postal savings systems provide depositors who do not have access to banks a safe and convenient method to save money. Many nations operate banking systems involving post offices to promote saving money among the poor.
Post Office, the Department of Post, is also known as India Post. It offers many services to the Indian population.
India Post offers its customers the facility of a Post Office Recurring Deposit (RD) (5-Year). It is a deposit scheme which allows customers to add to their savings by investing money which earns interest over a fixed period of time. An RD is usually opened for a fixed period of time and deposits must be made at preset intervals. The intervals may be monthly, quarterly, depending on the terms and conditions of the deposit scheme. Unlike a fixed deposit, an RD is not a one-time investment and may be closed before its maturity date.
The Post Office Recurring Deposit Account is an ideal investment option for first time investors or young professionals. This is so as it does not need customers to invest large sums of money towards installments. But it does earn you handsome interest at the end of the maturity period.
One can open an account by cash / cheque. In case of cheque, the date of deposit will be the date of presentation of cheque.
One has the option to convert a single account to a joint account. And Vice Versa
Post Office Recurring Deposit Suitablility
Conservative investors who are looking to invest regularly and earn assured returns on their investment. It is suitable for a person who has medium term goals which are 5 years away.
- Not for:-
Investors who are looking for wealth creation over a long term should not invest in post office recurring deposit. The reason behind this is inflation. The returns from the RD would not be able to beat inflation over a longer period of duration. Post office recurring deposit is also not suitable for investors who want invest a lump sum amount.
The principal and interest on the Post Office Recurring Deposit are absolutely guaranteed. The interest is compounded every quarter, which ensures that a sum of money multiplies by the time it matures.
Returns on recurring deposits are guaranteed for the duration of the deposit. Also, there is no risk of loss of principal.
Currently this RD scheme offers an interest rate of 6.90% per annum which is compounded quarterly. This interest rate converts to 7.08% per annum when compounded annually.
For example, if a person deposits Rs. 10/- at the above interest rate every month in his RD account, he/she will get Rs. 717.43 on the maturity of the deposit.
No Tax Benefits
There are no tax benefits available by investing in post office recurring deposit. The interest income is also considered as taxable income. This interest income will be taxed under the income head of ‘Income from Other Sources’. RD is taxed as per the applicable income tax rate.
There is no TDS deducted.
Post office recurring deposit provides rebates on advance deposits. These rebates are not much, but can help an individual with small resources save a considerable amount for other purposes.
- If you deposit more than 6 but less than 11 installments in advance in a month – Rs.1 discount for each Rs.10 installment. Thus, if you are depositing Rs.10,000 then the discount is Rs.1,000.
- If you deposit more than 12 installments in advance in a month – Rs.4 discount for every Rs.12 deposits and one rupee for every Rs. 10 deposit ahead.
Fairly Liquid Investment
There are situations where one is in urgent need of money. It is not recommended to close an RD before its maturity. But there is a provision for premature withdrawal of the amount in an RD.
After one year of opening the account one withdrawal up to 50% of the balance is allowed. It may be repaid in one lump sum along with interest at the prescribed rate at any time during the currency of the account.
Portability of the account from one post office to another is available. A recurring deposit account can be transferred from one post office to another.
Also, customers are free to open any number of recurring deposit accounts in any Post Office of their choice.
If an investor doesn’t want to invest in post office recurring deposit, it has the following alternatives available, which have same characteristics:-
- Bank Recurring Deposit
- Debt Mutual Funds