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Fixed Income Investments: All you need to know about Time Deposit, NSC, KVP

Priyadarshini Maji
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In the last few months, several banks-including SBI, HDFC Bank, Kotak Mahindra Bank, Punjab National Bank (PNB), and Axis Bank-have lowered their FD interest rates, especially with the RBI signaling a lower interest rate regime. These banks have reduced interest rates on their fixed deposits across different tenures. Risk-averse investors looking for a fixed-income investment can now look at post office small savings schemes. Compared to bank FDs, these small saving schemes offer a higher return and are safer too.

Most big banks over the term of 5 years offer a return of around 6.5 to 6.75 per cent, while with lump-sum deposits, post office schemes offer interest rates ranging between 7.6 and 7.9 per cent. A risk-averse investor wanting to invest for 5 years or more can look at either of the 3 funds offered by the post office small savings schemes: Post Office Time Deposit Account (POTD), Kisan Vikas Patra (KVP), and National Savings Certificate (NSC). Experts suggest locking funds for a longer duration is ideal, especially in a declining interest rate scenario.

Interest for Post Office Time Deposit Account is paid annually, whereas for Kisan Vikas Patra, and National Savings Certificate, interest gets accumulated and is paid on maturity, as they are cumulative in nature.

Here are the features and interest rates of time deposit, NSC, and KVP:

Post Office Time Deposit Account (TD)

The minimum investment that can be made with time deposit is Rs 200, which can then be increased in multiples of Rs 200 with no upper limit. The tenure available for time deposit account ranges form 1, 2, 3 to 5 years. The interest rate is paid annually for any Time Deposit, but is compounded on a quarterly basis.

These deposits can also be transferred from one post office to another. Even though this account can be opened in the name of a minor, a minor of 10 years or above can also open and operate this account. These accounts can either be held as joint accounts, or a single account can also be converted to a joint account.

Also, note that when a Time Deposit account matures, the account is then automatically renewed for the same tenure for which it was initially opened. For instance, a 3-year Time Deposit account will be automatically renewed for 3 years. The interest rate applicable as on the day of maturity:

The current interest rate offered from 01.07.2019 is as follows:

Period

Rate

 1 year A/c    6.9 per cent
 2 year A/c    6.9 per cent
 3 year A/c  6.9 per cent
 5 year A/c  7.7 per cent  

Interest earned in this scheme is fully taxable and gets added to the depositor’s income for that financial year. Only in the 5-year Time Deposit tax benefit available is on the investment made.

National Savings Certificate (NSC)

NCS comes with the minimum investment of Rs 100, which can be increased in multiples of Rs 100 with no upper limit. It is a 5-year investment scheme, wherein the interest gets accumulated and is paid along with the principal on maturity. The current interest rate offered is 7.9 per cent which is compounded annually but payable at maturity. For instance, if you invest Rs 1000 in National Savings Certificate today, you will get Rs 1462.5 as maturity value after 5 years.

Joint holding is allowed with this scheme. Only an individual can purchase an NSC certificate. Additionally, this scheme can also be bought by a minor, or on behalf of a minor. These certificates are also transferable from one person to another.

Investment in NSC also qualifies for income tax benefit under section 80C of the Income Tax Act. Additionally, the interest that gets accrued each year is reinvested and gets qualified for Section 80C tax benefit. The interest earned is also fully taxable in the hands of the investor.

Kisan Vikas Patra (KVP)

The minimum investment with KVP that can be made is Rs 1,000 which can be increased in multiples of Rs 1000 with no upper limit. With this scheme, the interest that gets accumulated with the principal amount is paid together on maturity. However, the catch with this scheme is that the invested amount is doubled on maturity, i.e in 113 months (9 years and 5 months). The current rate of interest on KVP certificates is 7.6 per cent payable at maturity, but compounded annually.

An individual can purchase a KVP certificate for themselves or on behalf of a minor. KVP can also be transferred from one person to another and can be encashed after 2.5 years from the date of issue.