BT Insights: Are Special FDs good for senior citizens?

Majority of senior citizens depend upon fixed deposits in their retirement years to take care of their regular expenses. They are also the most vulnerable as any fall in interest rate puts their budget in disarray. The way interest rate has consistently fallen over a period, senior citizens have been forced to re-consider their investment options. However, there is some good news for them. Many banks have come up with special rate FDs for senior citizens offering an attractive rate. Here are some options and ways to manage FD investment.

Know the Special Rates

The special FD called 'SBI Wecare' offered by SBI and 'Golden Years' by ICIC Bank are giving senior citizens an interest rate 0.8% above the interest rate given in general category. As a result while SBI is offering only 5.4% interest to general public, it is giving 6.2% interest to senior citizens.

Similarly, ICICI Bank is offering an interest rate of 6.55% to senior citizens when compared to 5.75% it offers to general public. HDFC Bank is giving additional 0.75% to senior citizens and offering FDs at 6.5%. These schemes are mostly applicable on FDs with maturity of 5 years and above.

Axis Bank has not brought out any special scheme but is giving a higher interest to senior citizen only on one tenure. For a term of 1 year to 1 year 5 days it gives a rate of 5.8% to general citizen, while it is offering a 0.65% higher interest rate of 6.45% to senior citizens.

Bandhan Bank is also giving a higher rate of 0.75% to senior citizens. For a term of 1 year to 3 years it is giving its best rate of 7.25% to senior citizens. For FD with term between 3 years to less than 5 years it is offering them a rate of 7.10%. If you go for a term of 5 years and above it is offering a rate of 7%.

Limited Period Offer

Most of these special FD schemes are available only for limited period. The special schemes of SBI and HDFC Bank will end on 30 September. This special rate offer is applicable on new FDs as well as renewal of maturing deposits.

Loss of in case of premature withdrawal

At the time of booking the interest rate may look advantageous but you have to keep in mind that most of these rates are offered on long term FDs. If you will need funds midway you may lose a significant chunk of your interest. "In case of premature withdrawal, the contracted interest rate is lowered by 0.5% to 1% for the period the fixed deposit remained with the bank. For example, if a fixed deposit for a term of five years is withdrawn at the end of the third year, the interest rate stands reduced for the entire three-year period," says Archit Gupta, Founder and CEO - Cleartax.

In long-term period like 5 years interest rate can change significantly. If it is on higher side you will not have the flexibility to move to new rates due to high migration cost. "As with regular FDs, closing these special FDs for senior citizens before their maturity date would incur premature withdrawal penalty. For example, HDFC Bank's 'Senior Citizen Care FD' scheme charges a penalty of 1% if the FD is withdrawn on or before 5 years and 1.25% penalty if the FD is withdrawn after 5 years. In case of ICICI Bank, a premature withdrawal penalty of 1.30% is levied if withdrawn on or after 5 years 1 day while a penalty of 1% is charged if the FD is closed before 5 years 1 day," says Naveen Kukreja - CEO& Co-founder, Paisabazaar.com

Therefore it makes sense for you to consider all aspect before deciding the investment amount. "Depositors should opt for these special FDs only if the investment horizons of their financial goals coincide with the tenure of these FDs. Making premature withdrawals would lead to lower returns from these FDs due to premature withdrawal penalties levied on them," says Kukreja of Paisabazaar.com.

TDS advantage

While banks are required to deduct TDS on interest earned on bank FDs, there is especial exemption due to coronavirus. "The banks are not required to deduct tax (TDS) on interest paid up to Rs 50,000 on various fixed deposits. In case of interest payments above Rs 50,000, the TDS rate is 10%. However, as a COVID-19 relief measure, for all interest credits from 14 May 2020 until 31 March 2021, the TDS rate stands reduced to 7.5%," says Gupta of Cleartax.

In case your income falls below Rs 5 lakh you have the option to save TDS deduction on your FDs. "The basic exemption limit for senior citizens who are 60 to 79 years of age is Rs 3 lakh. They can also claim a full tax rebate if their taxable income is up to Rs 5 lakh. In the case of super senior citizens who are 80 years and above, the basic exemption limit is Rs 5 lakh. Hence, if the estimated annual income of senior citizens results in a nil tax payable, they can submit form 15H to claim exemption from TDS," adds Gupta of Cleartax.

Should you invest?

The especial schemes offer a good proposition after considering many other factors like ease of operation, accessibility, relationship and so on. If you have been investing in similar bank deposits with long term horizon then going for special FDs makes sense.

"Senior citizens mostly depend on passive income such as interest, pension and dividends in their post-retirement years. The interest rate of 6.5% offered in the scheme is attractive in a low-interest-rate environment," says Gupta of Cleartax. However, if you need funds in between then it is better to avoid these FDs keeping in mind the loss due to reduced interest rate.

Currently interest rates are at historical low, but going forward things may change within 1-3 years. It will better to keep your investment divided into FDs of long and medium tenure. If you invest some amount in 1-3 years term and find interest rate moving up you may re-allocate these funds at higher rate when they mature.

Consider other options

Besides these special schemes there are other good options to consider. As far as interest rate is concerned, Small Savings Schemes also come with good options. Senior Citizen Savings Scheme, which comes for a term of 5 years, is currently offering a high interest rate of 7.4%. Considering the government backing, it is definitely one of the best options. NSC, Post Office MIS and Post Office Time Deposit also offer very attractive interest rates which can be considered before taking a final call on your next investment.

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