The best deposits for senior citizens

BL :BHAVANA ACHARYA 15 June 2014 

Karnataka Bank, Lakshmi Vilas Bank and Tamilnad Mercantile Bank offer attractive rates for 1- to 2-year deposits

With the interest rate cycle set to turn sooner rather than later, this is an opportune time to invest in bank deposits that offer good rates. Such deposits also suit the investment needs of senior citizens well, considering that safety is their top priority.

Rates for investors above 60 years of age are 30-50 basis points higher than the regular rates, giving seniors an added incentive to park their money in FDs. For many banks, differential rates apply to deposits of six months and over, or one year and above. But with a bewildering number of banks, time periods and rates to choose from, narrowing down where to invest can be challenging.

Moreover, as a senior citizen, you may have less leeway to stay invested for the very long term. You may need to keep cash relatively accessible. Here are a few attractive deposits that may serve your purpose.

For an investment horizon of one year or less, several banks offer rates that are quite close to one another. IDBI Bank, for example, gives an interest rate of 9.6 per cent for deposit periods of six months and two days to 499 days.

For a period of exactly one year, Dena Bank offers 9.6 per cent while Punjab National Bank gives a 9.5 per cent rate. Kotak Mahindra Bank and ING Vysya Bank pay out 9.5 per cent for a 365-day deposit.

For up to three years

But the rates on offer for one- to two-year periods are slightly higher than this and are currently the best options among various tenures.

Karnataka Bank, Lakshmi Vilas Bank (LVB) and Tamilnad Mercantile Bank (TMB) offer senior citizens an interest rate of 10 per cent for deposits of one-two years, unmatched by other banks. If you can stay invested for the slightly longer term, of two to three years, choose from the trio mentioned above — Karnataka Bank, TMB, and LVB. You also have Karur Vysya Bank (KVB) and DCB.

All these banks pay interest at 9.75 per cent. Axis Bank is another option, as it gives 9.85 per cent interest on deposits of two to three years.

Besides the regular time buckets, some banks have specialised deposits with higher interest rates. South Indian Bank’s 400-day deposit, for instance.

On this, the bank pays an interest of 10 per cent, while deposits above or below this period get 9.5 per cent.

Similarly, IndusInd Bank will pay 9.75 per cent if the deposit period is between two years and six months and two years and nine months.

Ideal tenure

If an even longer period is what you’re after, it doesn’t really make a difference whether you’re staying put for three years or ten as far as interest goes.

The interest rate you get is the same. TMB, LVB, and KVB pass the higher rates baton between them for deposit timeframes extending to ten years, but all are at 9.75 per cent.

But remember that locking in deposits for several years is also not a good idea.

Predicting how interest rates will move in ten years or even five years is hard, and rates can go through several cycles. It is advisable, therefore, to keep your money in for a maximum of five years.

Compounding of interest is done either quarterly or half-yearly for all bank deposits, making your overall yield slightly higher if you choose to reinvest.

Quarterly interest means depositors lose Rs 2,500 crore every year

Depositors are losing close to Rs 2,500 crore every year because of Indian banks applying interest on deposits every quarter instead of every month.

Mayur Shetty, TNN | Jul 5, 2013, 12.48AM IST

MUMBAI: Depositors are losing close to Rs 2,500 crore every year because of Indian banks applying interest on deposits every quarter instead of every month, according to a report by the Indian Institute of Technology, Mumbai.

 This is in contrast to loans where interest is applied on a monthly basis.

To study the impact of this discrimination, one needs to compare the interest liability on a Rs 1 lakh education loan at the end of the year compared to earnings from a fixed deposit assuming interest on both was 10%. While the interest earned on the FD would be around Rs 10,381, the interest liability on the loan would be Rs 10,471. Such comparison is only possible in education loans where there is no repayment in the first year.

At present, the Reserve Bank of India (RBI) mandates banks to apply interest on deposits at quarterly or larger intervals. Banks also calculate interests accrued on a fortnightly basis but only for reporting to RBI.

The technical report by Ashish Das from IIT's mathematics department published this week is expected to be taken seriously by RBI, considering that the central bank itself had raised the issue in the past.

 The report, titled 'Interest of bank depositors in chaos', has studied interest application frequency on bank deposits and the methodology used by banks in calculating interest income.

The regulator also paid heed to earlier reports from the same author, which resulted in regulatory changes including recommendation that banks apply interest on daily balances in savingsdeposits. 

A subsequent paper had suggested that RBI directs banks to reduce fees charged to merchants for settling payments from debit cards since banks were merely transferring funds from customer accounts and not providing a loan to the cardholder as was happening in credit cards.

"The application of interest at six monthly rests has been more of a legacy. It was more from the ease and convenience of interest computation at the pre-computer era. Such a scenario no longer exists since the country today has a satisfactory level of computerization in commercial banks," said Das. 

The report points out that because of lax regulation some banks such as HDFC Bank(effective April 2011) moved from their earlier quarterly application of interest to half yearly application. "Such a move, though beneficial to the banks, is at the cost of their SB depositors," the report said.

If banks were directed to apply interest at the end of every month, the return for the depositor would rise by around Rs 90 for someone with a Rs 1 lakh FD.

At a systemic level, total savings to banks runs into crores considering that there are 800 million bank accounts with Rs 15.5 lakh crore in savings accounts and Rs 45 lakh crore in FDs.

The study also finds that the amount of tax deducted at source can come down by Rs 400 to Rs 500 crore if banks applied TDS at the end of the financial year and paid the amount out of savings account rather than charging it to the fixed deposit.