Post Office Fixed Deposits (also known as Time Deposits) are a great option for investors who want to earn guaranteed profits while staying out of the volatility of the stock market. Currently, the government offers an attractive annual interest rate of 7.5% on 5-year Post Office FDs. This means that if you deposit ₹4 lakh in a lump sum, you could receive a hefty sum of ₹5,79,979 upon maturity.
Being run by the Government of India, your money is 100% safe. In this article, we’ll explore how the magic of compounding helps your money grow and why this scheme is proving to be superior to bank FDs.
Why is FD the most special and beneficial
While 1-, 2-, and 3-year FDs are also available at the Post Office, most experts recommend the 5-year scheme. The main reason for this is that the 5-year term offers the highest interest rate of 7.5%, while shorter-term FDs offer slightly lower interest rates.
Furthermore, investing in a 5-year FD also provides you with the legal benefit of a tax deduction of up to ₹1.5 lakh under Income Tax Section 80C. This means that this scheme not only provides profits but also reduces your tax liability.
Who should invest in a Post Office FD
This scheme is a boon for those who are risk-averse. This is especially true for senior citizens who want a safe and stable fund after retirement. Employed individuals who want to create a fixed fund for future goals, such as their children’s education or marriage, can also invest safely in it. For families in both rural and urban areas, this scheme is often considered more secure and profitable than bank investments.
How much will you earn on an investment of ₹4 lakh
The biggest question is, how does ₹4 lakh become ₹579,979 in just 5 years? The secret lies in the power of quarterly compounding at the Post Office. Interest is calculated every three months at the Post Office and added to your principal. You also earn interest on the previous interest for the next three months. If we calculate an investment of ₹400,000 at an annual rate of 7.5%, over a period of 5 years, you earn approximately ₹179,979 in interest alone. Thus, your total maturity amount becomes ₹579,979.
Rules for Prematurely Breaking an FD
Unexpected cash needs can arise at any time, so the Post Office offers the option to close an FD. However, there are some strict rules. If you withdraw money before the stipulated time limit, your interest rate is reduced, and you are often paid the same interest as a regular savings account. Therefore, before investing, ensure that you only deposit funds that you will not immediately need until maturity so that you can benefit from the full 7.5% interest rate.
Bank FD vs. Post Office FD
People are often confused about whether to keep their money in a bank or a post office. Bank FDs are safe, but their security is guaranteed only to a limited extent by the government. In contrast, Post Office FDs have a direct sovereign guarantee from the Government of India on your entire deposit. Furthermore, in the current scenario, Post Office interest rates are more attractive than those of many major commercial banks. This is why even today, people trust post office deposit schemes the most for long-term investment.