Work out the interest on a Post Office Time Deposit for one, two, three or five years, with the annual payout convention and premature closure applied correctly.
Is a Post Office Time Deposit the same as an FD?
Nearly, but not on interest. A bank cumulative FD keeps the interest inside the deposit so it earns interest of its own. A Time Deposit pays it out every year, and that payment earns nothing further under the scheme. Over five years at 7.5% on ₹5,00,000 the difference is more than ₹32,000.
Why is the yield higher than the rate?
Because the scheme compounds quarterly to arrive at the annual figure. At a notified 7.5%, four quarters of 1.875% come to 7.71% for the year. That is the number your annual cheque reflects, and it is why 7.5% here beats a bank paying 7.5% compounded yearly.
What can I do with the annual interest?
It is credited to your post office savings account. Leave it there and it earns only the savings rate, which wastes it. Many people set up a standing instruction into a Recurring Deposit or a monthly SIP, which restores the compounding the scheme itself does not give you.
Which terms save tax?
Only the five year account, and only on the deposit, under section 80C within the ₹1,50,000 limit you already share with PPF and EPF. One, two and three year accounts get no deduction. The interest is taxable at your slab rate in every case.
Can I close it early?
Not in the first six months. Between six and twelve months you get the Post Office Savings Account rate, currently 4%, on the whole period. After a completed year you get the rate for the term you actually completed, less two percentage points, plus the savings rate on any extra months.
Do the rates change after I open the account?
No. The rate is fixed for your whole term on the day you open the account, even though the Ministry of Finance notifies new rates every quarter. A five year account opened today keeps today’s rate until it matures.