TOUGH times stare at investors looking for fixed income instruments. The deposit rates offered by banks have fallen to five-year lows. Bank FDs were the favourites till some months back as public and private sector banks offered upto 9% interest on deposits with maturity of 3 years and above. This has now declined to around 7%. The future looks bleaker, with the deposit rates expected to decline further by 50-100 basis points. What should the fixed income lovers do in such a scenario? Is there an alternative to bank FDs?

The Post Office Monthly Income Scheme, commonly known as MIS, is the answer. MIS was quite popular some years back. Its appeal, however, declined in the face of a rise in interest rates on FDs and aggressive marketing strategies unleashed by banks to woo new depositors. MIS could come into limelight once again in the backdrop of declining interest rates. Moreover, the post office deposits come with unique features such as a government guarantee on the deposit amount and fixed rate of interest.

Like any fixed deposit, a lump sum amount deposited with the post office under the aegis of MIS will earn an interest at a fixed rate of 8% per annum. And, unlike bank FDs, the interest is paid out every month. The tenure is fixed at 6 years. Apart from monthly interest-payout, MIS offers 5% bonus on maturity. The effective annual yield therefore works out to 8.9%, which is much higher than the bank deposit. The value add-on is that the monthly MIS proceeds could be invested directly in Post Office’s Recurring deposit (RD), which gives annual returns of almost 10.5% per annum.

**HOW DOES IT WORK?**

Suppose Mr A invests Rs 90,000 in Bank FD for six years. With the rate of deposit hovering around 7%, Mr A will receive almost Rs 46,500 as interest at maturity and an option of compounded interest. On the other hand, if Mr B put Rs 90,000 into MIS today, he will receive Rs 600 every month for 72 months. He is entitled to Rs 43,200 in the form of monthly interest till maturity and Rs 4500 as bonus at the time of maturity. Mr B’s returns total Rs 47,700 in six years, which is higher than interest earned on the bank FD of the same tenure.

Suppose that Mr B did not require the monthly interest. So he opts for automatic transfer of MIS interest to Recurring Deposit. A sum of Rs 600 is deposited in his RD account every month, offering 7.5% per annum compounded quarterly. At the end of the sixth year, Mr B will receive almost Rs 51,400 from his RD account. The receivables from RD and the bonus on MIS total Rs 56,000 in six years. As a result, Mr B, who invested in MIS and monthly proceeds in RD, will accumulate Rs 9500 more than Mr A, who opted to invest in Bank FD of the same tenure.

The same features of MIS make it unattractive. The interest income is fully taxable as in the case of bank FDs. MIS do have an edge over bank FDs as there is no tax deduction at source (TDS). However, the bank FDs maturing above 5 years are subject to tax benefits under Sec 80C.

It will be definitely a better bet if one neglects the tax implications of the scheme. The rate of return is not interest rate sensitive. Though the general interest rates may fall further, the scheme will continue to fetch 8% fixed rate of interest. Further, a combination with RD will even earn an effective yield of 10.5%, which is attractive in times of uncertainty and falling interest rates.

Source: EconomicTimes

what is the current post office MIS interest rate. I assume it is 6 percent?

ReplyDeleteI started my RD from May 2007 for 5 years and amount is Rs.500/- per month. how munch i got at the end of the fifth year. please explain and send detials on my mail id is nishart18@gmail.com.

ReplyDeleteThank You,

Nisha

You can use this calculator to calculate recurring deposit amount.

ReplyDeletehttp://www.teacherone.com/Business/recur_deposit/recur_deposit_maturity_calculator.php

Thanks a lot Vinay...i was searching a tool like this where i can easily calculate the interest.

ReplyDeleteReally it is very very very usefull link.

Thank you once again.. :)

Regards

Aravind M Potadar

Bangalore-50

what is the interst rate?how much i will get if i invest 1000 per month.send me detail

ReplyDeleteI started my RD from May 2011 for 6 years and amount is Rs.700/- per month. how munch i got at the end of the fifth year. please explain and send detials on my mail id is pc_varthy@rediffmail.com.

ReplyDeleteThank You,

P.c.varthy

Dear concern, i have started my RD with rupees 700 per month 4 years back. what will be the total amount after completion of 5 year term. thanks and regard's, Md Ali

ReplyDeletemohdali_hyd@yahoo.co.in

I started my RD from January 23rd for 2 years and amount is Rs.1000/- per month. how munch i got at the end of the second year. please explain and send detials on my mail id is manjulav86@gmail.com.

ReplyDeletehow much interest rate?if i invest 5000 per month? send me mail on sahilnk67@yahoo.com

ReplyDeletehow much interest for one year Rs.1,00,000/- amount

ReplyDeletehi could anyboby plz guide where and how can i invest my pocket money that i have accumulated which is 50000Rs so that i get maximum benefit on a monthly basis which is free of risk safe and assured so that i can utilize it for my studies.

ReplyDeletethankyou

hi could anyboby plz guide where and how can i invest my pocket money that i have accumulated which is 50000Rs so that i get maximum benefit on a monthly basis which is free of risk safe and assured so that i can utilize it for my studies.

ReplyDeletethankyou

if i deposite 20,000/then how much amount return at the time of my maturity. pl

ReplyDeleteplz give em instructions that how to find the interest in MIS

ReplyDeletewhat sum of interest i will receive after investing a amount of Rs 900000/ jointly per month

ReplyDelete