Are HDFC Bank special FDs offering 7.25% interest really special? For just 5 months more, there could be better options

HDFC Bank, the largest private sector bank, has launched special edition fixed deposits (FDs) this week. Under this scheme, the bank offers an interest rate of 7.20 per cent for fixed deposits maturing in 35 months, and 7.25 per cent for deposits maturing in 55 months. Senior citizens can earn an additional 0.50 per cent on deposits of similar tenures. So, a senior citizen will earn an interest rate of 7.7 per cent on FDs maturing in 35 months and 7.75 per cent on FDs maturing in 55 months in HDFC Bank.

"Enjoy HIGHER FD Rates @7.20% on tenure 35 months and @7.25% on tenure 55 months. What's more? Senior Citizen benefits 0.50% EXTRA!...So Hurry! Valid for Limited Period only!," said the private sector lender on its website.

If you compare the interest rate with the FD rates of 6 per cent or less just a year ago, then these rates appear to be very attractive, especially when coming from a big bank. However, is it the best option available in the market? Before you rush to book your FD, take a minute to understand these HDFC Bank special edition FDs and compare it with other safer options like post office time deposits and National Savings Certificate (NSC).

HDFC Bank special FD vs POTD: Where do you get higher interest?

Post-deposit time deposits offer an interest rate of 7 per cent for deposits maturing in 36 months or three years. For a comparable tenure, which is 35 months, HDFC Bank offers an additional 0.20 per cent for general customers.

Post-office time deposits of five years fetch an interest rate of 7.5 per cent, while HDFC Bank offers 7.25 per cent on comparable FD with tenure of 55 months. So, the general public, who are not senior citizens, can get 0.25 per cent extra if they keep money in the post-office time deposit scheme for five years.

When it comes to senior citizens, they are better off with HDFC Bank FD for longer tenure closer to five years, as the bank offers 7.75 per cent interest rate on HDFC special edition FDs while POTD does not offer any special rate to senior citizens, so they will get the same 7.5 per cent interest rate in POTD.

Another small savings scheme National Savings Certificate (NSC) offers an interest rate of 7.7 per cent. Also backed by the central government, it has a lock-in period of five years.

HDFC Bank Special FDs vs Post office Time Deposits: A look at how they compare
*Premature rules are explained in detail in the story

HDFC Bank special FD vs POTD: How is the interest rate calculated?

In HDFC Bank the interest on fixed deposits is calculated quarterly. Investors have the option to choose how they want to receive the pay-out of interest for deposits — monthly, quarterly, or on maturity. For post-office time deposits, the interest is calculated quarterly and payable annually.

For post-office time deposits, the interest is calculated quarterly and payable annually.

The interest rate of NSC is compounded annually while bank FDs have quarterly compounding of interest rate which gives a marginally higher annual yield.

The interest rate of POTD is guaranteed for the tenure the investor opts for. Simply put, the rates will remain the same for the entire term of a deposit once the investor has made an investment. The interest rate of fixed deposits works in a similar way in banks.

HDFC Bank special FD vs post office deposits: Is it risk-free?
Post office term deposits and NSC are backed by the government of India. So, it is considered one of the least risky investments in India.

Fixed deposits in banks are protected by the deposit insurance program, however, it has its limitations. Under this insurance program, each depositor of each scheduled bank is covered for cumulative deposits (including fixed, current, savings, and recurring deposits) of up to Rs 5 lakh, in case of bank failures. Do note that it includes both the principal and interest amounts.

For cumulative fixed deposits, you should invest in a way that the total amount remains within the threshold of Rs 5 lakh at the time of maturity of your deposit.

You should also note that the Reserve Bank of India (RBI) has identified three domestic systemically important banks (SIBs) in India — SBI, ICICI Bank, and HDFC Bank — which are too big and important for India's economic system.

What are the charges for premature withdrawal?
Despite having a fixed lock-in period, post office term deposits allow you to withdraw money prematurely, just like fixed deposits in banks. Let's look at the premature withdrawal charges.

Investors can withdraw their money from post office term deposits after six months. If the post office time deposit is closed after six months and before one year, investors will get the post office savings account interest rate applicable at that time. For the April-June quarter of 2023, the interest rate of the PO savings account is 4 per cent.

If a three-year POTD or five-year POTD account is prematurely closed after one year, the interest will be calculated as two per cent less than the time deposit interest rate (i.e., two or three years) for completed years. For the remaining period of less than a year, PO savings interest rates will be applicable.

For premature closure of FDs in HDFC Bank, the interest rate will be 1 per cent below of the lower of either a) The rate for the original/contracted tenor for which the deposit has been booked or b) The base rate applicable for the tenure for which the deposit has been in force with the bank. The base rate applicable to deposits is the rate applicable to deposits of less than Rs 2 crore, as of the date of the deposit.

NSC also does not allow premature closure except in case of the death of depositors, on forfeiture by a pledge from a Gazette officer or an order by the court.

Can investors save tax on special editions FD or post office time deposits?
Investors can claim tax benefits for investing in a five-year post office term deposit under Section 80C of the Income Tax Act, 1961. No tax benefits will be available for three-year post office time deposits or both HDFC special editions FDs.

Is income from FD or POTD taxable?
Interest income is taxable for both HDFC Bank special edition fixed deposits, post office time deposits and NSC. If earnings from all fixed deposits held in banks cumulatively cross a threshold of Rs 40,000 in a financial year, the investor will have to pay Tax Deducted at Source (TDS). There is no such TDS deduction done on time deposits held in a post office.

However, the interest earned on NSC is not paid to the investor every financial year. This amount is re-invested in National Savings Certificate. So, you have the option to claim a tax deduction on the interest earned from NSC under Section 80C while filing your income tax return every financial year.