Alternative Investments to Fixed Deposits as FD Interest Rates Begin to Drop

Banks have started reducing interest rates on fixed deposits (FDs) since the Reserve Bank of India cut the repo rate by 25 basis points in February. With further rate cuts anticipated this year, FD rates will likely decline more. FDs are often preferred by those seeking a fixed return with minimal risk. They are a popular choice of investment for many senior citizens. However, as FD rates decrease, where else can you invest? Here are a few alternatives to fixed deposits that you can consider.

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Post Office Savings Schemes: PPF, SCSS, NSC, Sukanya Samriddhi Yojana and Others

Small Savings Schemes, popularly known as Post Office Savings Schemes, are a good alternative to fixed deposits. Fixed return, sovereign guarantee, and good liquidity make them perfect for those who prefer fixed deposits.

Some of the popular Post Office Savings Schemes include the Public Provident Fund (PPF), Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), and Sukanya Samriddhi Yojana (SSY).

Most Post Office Savings Schemes offer returns generally higher than, or on par with, those of fixed bank deposits.

Take a look at the latest Post Office Savings Schemes and interest rates available for the January-March quarter of 2025.

Many Small Savings Schemes, such as PPF, Senior Citizen Savings Scheme, Sukanya Samriddhi Yojana, and 5-year Post Office Time Deposits, NSC also qualify for tax deductions under Section 80C in the old tax regime.

Keep in mind that various Small Savings Schemes have different eligibility criteria. For instance, only senior citizens (with certain exceptions) can enrol in the Senior Citizen Savings Scheme. You can only enrol in the Sukanya Samriddhi Yojana if you have a girl child. So, you must check whether you can invest in a particular post office scheme before deciding.

If you want to book the current interest rates on the Post Office Savings Scheme, book before March 31, 2025, as the interest rates are quarterly.

Government Securities: T-Bills and Government Bonds

Government securities, primarily long-dated bonds and treasury bills (T-Bills) can be a possible alternative to fixed deposits for investors seeking capital safety. Since the Government of India backs these securities, they are generally considered a secure investment option.

By definition, T-Bills are short-term debt securities issued by the government. There are three variants of T-Bills, which vary based on their maturity periods: 91 days, 182 days, and 364 days.

Remember that T-Bills are issued at a discounted rate to their true value or par value. Upon maturity, investors receive the par value.

For example, consider a 91-day T-Bill with a true value of Rs 98. Now, this T-Bill is issued at a discount to its par value, say Rs 95. After 91 days, you would redeem at its par value, i.e., for Rs 98.

Typically, 91-day T-Bill yields range from 6% to 7.5%.

Unlike T-Bills, government bonds typically have a longer tenure. Interest on bonds is paid twice a year. These interest payments are credited directly to your bank account linked to your Demat account.

The interest credited to your bank account is considered income from other sources, and taxes must be paid according to the applicable income tax slab. The gains from bonds are treated as capital gains, with a long-term capital gains (LTCG) tax rate of 12.5% flat. STCG are taxed based on the applicable slab rate. Additionally, there is no TDS on interest payments received for G-secs.

Earlier, investment in G-Sec bonds and T-Bills was restricted to banks and large financial institutions, with a minimum ticket size of Rs 5 crore. However, retail investors can now invest in these two debt instruments through the RBI Retail Direct portal, starting with a minimum investment of Rs 10,000. 

Final Thoughts

While Fixed Deposits remain a safe investment, their declining interest rates make it crucial to explore alternatives. Post Office schemes, government securities, and gold investments might be some options to look for. It’s very important to compare rates before investing.

Also individuals should assess their financial personality, life goals, and liquidity needs to make an informed decision. By diversifying investments, one can build a more robust and inflation-resistant financial portfolio.