How to open Post Office Time Deposit Scheme

By Sunil Dhawan

The post office time deposit (POTD) is an alternative to the bank fixed deposits (FD) for those looking for fixed income. It is safer than than an FD because the principal invested and interest earned are backed by sovereign guarantee. Whereas for bank FDs, under the deposit insurance and credit guarantee corporation (DICGC) rules, each depositor in a bank is insured up to a maximum of Rs 1 lakh for both principal and interest amount. 

So, if you are planning on investing in a post office time deposit, here is everything you need to know. 

Where to open
To invest in a POTD, you don’t have to necessarily open it at a post office closest to where you live. Of late, the central government has authorised all public sector banks and private ones like ICICI Bank, Axis Bank, and HDFC Bank to allow investors to open POTD accounts. 

Tenures and investment amount
In a POTD, there are four tenure options- 1, 2, 3 and 5-year deposits. Only one deposit can be made in one account, however, any number of accounts can be opened in any post office. The minimum deposit has to be Rs 200 and thereafter in multiples of Rs 200. More importantly, where the amount is not in multiples of Rs. 200, the amount in multiples of Rs. 200 may be retained in the account and the balance refunded to the depositors without interest 

Interest payments
The interest rate of POTD is set by the government at the start of each quarter in a financial year. Currently, (April-June 2018) the interest rate is 6.6 percent, 6.7 percent, 6.9 percent, and 7.4 percent for 1-, 2-, 3-, and 5-year tenures, respectively. Once invested, the interest remains constant for the entire duration of the deposit. 

Interest is payable annually but it is calculated quarterly. If it is a 1-year account, the amount of interest will be repaid along with the principal. In the case 2-,3-,5-year accounts, the amount will be paid either in cash or by cheque. If the maturity amount, including interest, earned is more than Rs 20,000, the payment cannot be made by cash; it can only be made by cheque. 

Spread over G-sec yield
The interest rate on small savings investments including POTD is set by government at the beginning of every quarter of the financial year. The rate is decided based on the yield on government securities and usually have a spread or a mark-up over the g-sec yield. However, 1-, 2- and 3-year POTDs deposits will not have a spread over the G-Sec yield, while the 5-year deposit will have a spread of 25 bps over the G-Sec yield of comparable securities. 

Interest redirected to savings account
If you do not wish to withdraw the annual interest, you can instruct the post office to re-direct it into the post office savings account, which earns 4 percent per annum. This can be done in case of POTD with tenure of 2/3/5-years. 

Interest redirected to recurring deposits 
If you do not want to withdraw the annual interest, you may give instructions to the post office to re-direct the annual interest into a post office 5-year recurring deposit account in the same office in lieu of payment of 12 monthly installments. Every year, the depositor will have to give a fresh application for this purpose before the due date on which the interest falls due for payment. 
However, before you consider transferring the annual interest of POTD into post office savings account or the RD account, have a look at the two conditions – One, the savings account has to be in the same post office and secondly, this facility will not be available at sub offices and branch offices but only at Head or Departmental Sub Offices. 

There is no incidence of tax deducted at source (TDS) in post office small savings schemes. But that does not mean that the interest is tax-free. The interest income earned is to be added to one’s total income in the year of receipt and is liable to be taxed as per the tax rate of the investor. The post-tax return may, therefore, be low especially for those in the highest tax bracket. It’s only the 5-year deposit that carries the tax benefit under section 80C of the .. 

On maturity
In post offices equipped with core banking solution (CBS), upon the maturity, the same POTD gets automatically renewed for the period for which the deposit was initially opened. The interest rate applicable on the day of maturity will be applied on renewal of the deposit. For example, a 2-year POTD account will be automatically renewed for 2 years. In a non-CBS branch, the investor has to renew it by filling up the form again, if he wishes so. 

Premature exit
Being long-term deposits, one needs to be aware of the premature exit rules as POTD cannot be closed in the initial 6 months. If the account is closed after 6 months but before 1 year interest payable on a post office savings bank account will be paid. Thereafter, one can prematurely exit with a discount of 1 percent on the interest rate payable. 

Should you invest?
At times, POTD may offer a rate higher than the bank FD for certain tenures. Most investors generally find it easier to transact and invest in banks compared to physically going to post offices for such investments, and they can even be opened online. POTD may suit those investors who are ultra conservative in terms of risk and want assured returns with highest safety of principal. 

Source:-The Economic Times

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