Several banks have increased their fixed deposit rates recently. Senior citizens get an increased rate on such deposits. But does it make sense to invest in FDs? Here’s why, they are perhaps the best investment option for certain categories of senior citizens
Indian banks are in a campaign mode to mop up savings of people through fixed deposits, among others. Recently, Bank of India launched a product called ‘Star Super Triple Seven Fixed Deposit’ which has a lock-in of 777 days, and offers a rate of interest of 7.75 per cent for senior citizens.
Another state-run bank, Bank of Baroda, too, introduced a new fixed deposit scheme called ‘Tiranga Plus’, which is giving a rate of interest of 7.25 per cent for 399 days to senior citizens. There are other banks, too, which have launched similar schemes.
Says Ajay K. Khurana, executive director, Bank of Baroda, in a statement: “In a rising interest rate environment, we are pleased to offer a higher rate of interest to consumers so that they earn more on their savings. On our non-callable deposits, the bank has also decided to increase the non-callable premium from 0.15 per cent to 0.25 per cent on retail term deposits.”
Senior citizens hold a special category under income tax and they get various benefits, too, including tax benefits on fixed deposit interest, TDS benefit, special extra interest rate, among others.
Anup Bansal, chief business officer, Scripbox, a Bengaluru based financial services company, said that FDs are seen as one of the most traditional ways to invest money and ensure safety and when "compared to individuals who are less than 60 years of age, senior citizens do have a better utility of FDs. They enjoy better returns and also save on taxes,"
"If they are looking to include short-term investments in their portfolio in addition to having liquidity for emergency purposes, FDs are a good investment option for them. However, for better returns, a diversified and risk-optimized portfolio based on age and life stage should be preferred," Bansal further added.
Recently the Reserve Bank of India (RBI) increased the repo rates and that had a direct impact on the deposit and lending rates of various bank schemes. While there are other investment options too, but bank fixed deposits have their own share of believers.
Bank fixed deposits could be the best investment option for certain categories of senior citizens. Here’s why they should invest in bank FDs.
Risk averse seniors who need a reliable investment: Jitendra Dhaka, founder, BankSathi, a Bengaluru-based financial advisory services platform, says that a senior citizen FD scheme is among the “best choice” because of the fact that the interest rate is locked and also guaranteed for payment in the desirable future. Now, with increased interest rates, FDs are the most reliable and risk-free investment that a senior citizen can make, but given the current rising interest rate scenario, "senior citizens should search for a bank that offers interest rates that outpace inflation."
Fixed deposits come with insurance cover by deposit insurance and credit guarantee corporation (DICGC) for up to Rs 5 lakh per bank.
“If you have deposits with more than one bank, deposit insurance coverage limit is applied separately to the deposits in each bank,” the RBI says in an FAQ.
Seniors who need a regular stable income: Abhijit Talukdar, founder of Attainix Consulting and a Sebi-registered investment advisors says that senior citizens who have a lump sum amount at this moment, should consider a bank FD because of the benefit of a higher regular income.
Senior citizens can invest in Senior Citizen Savings Scheme (SCSS) from the post office too, but that has a maximum limit of Rs 15 lakh, while there is no such limit on a bank FD. At present, inflation and post-tax return on an FD might not seem like a big amount, but the RBI is mandated to bring inflation under a manageable limit, which is 4-6 per cent.
Talukdar adds: “Since seniors will do an FD now, they get to lock in the specific interest rate for an extended tenure, they will be benefited as and when inflation comes down in the near future.”
Talukdar advised seniors investing in FDs to stagger or ladder their FD amount into two or more tenures. This is because most banks charge a premature penalty, and if a senior citizen needs money and has no other liquid cash, liquidating the FD would be his/her only option.
“By laddering the FD amount into different tenures, one can get the desired liquidity and the flexibility of availing the best interest rate in one’s favour in the future at the same time,” he adds.
Seniors who need a tax-saving FD: The tax benefits available under a post office SCSS is also available for a tax-saver fixed deposit with a 5-year lock-in period. The tax deduction for such a fixed deposit can be claimed under deductions u/s 80C of the Income-tax Act, 1961.
Mihir Tanna, associate director of SK Patodia and Associates, a Mumbai based chartered accountants firm, explains this with an example.
“If we assume that a senior citizen (age between 60 and 80 years) is earning Rs 10 lakh in a year, and doesn’t have any other deduction u/s 80C, then he/she can invest Rs 1.5 lakh in tax-saver FDs and reduce tax liability from 1,14,400 to 83,200,” Tanna adds.