Rs 1 lakh investment in these guaranteed-income schemes becomes Rs 1.44 lakh in 5 years, offers Rs 1.5 lakh 80C tax benefit a year

Five-year fixed deposit (FD) interest rate: Did you know that money parked in a five-year fixed deposit not only grows steadily but also helps you avail income tax benefits up to Rs 1.5 lakh in a financial year? Here’s a lowdown on how a sum of money invested in five-year FDs at State Bank of India (SBI) and at the post office grows over time, with examples. First things first, let's take a look at the interest rates offered by SBI and the India Post on fixed deposits (FDs) in these maturity options.

First things first, let's compare the interest rates. 

SBI vs Post Office: Interest rate 

SBI five-year FD interest rate: With effect from December 27, 2023, SBI pays interest of 6.5 per cent and 7.5 per cent per annum (including an additional premium of 50 basis points under the SBI We-care scheme) on domestic term deposits up to Rs 2 crore to general and senior citizen depositors, respectively, according to the PSU bank's portal, sbi.co.in. 

Post office five-year FD interest rate: India Post, on the other hand, pays interest at the rate of 7.5 per cent per annum to all its depositors in the five-year Time Deposit small savings scheme account, according to its website, indiapost.gov.in.

Interest in both types of FDs is calculated quarterly.

Here's a summary of how an investment of Rs 1 lakh grows at the end of each year in both options: 

Understanding the difference between yearly compounding and quarterly compounding

Quarterly compounding and yearly compounding are two common methods used in finance to calculate interest on investments or loans. Both lead to slightly different results as quarterly compounding, as the name suggests, involves calculating interest four times a year whereas yearly compounding involves calculating interest only once a year. However, the main difference lies in the frequency of compounding, which affects the overall amount of interest accumulated.

With the same interest rate, which compounding method yields a higher return?

Quarterly compounding results in slightly higher returns due to more frequent compounding periods.

SBI FD vs post office FD: Income tax on five-year term deposit

Investments in the five-year maturity option of fixed deposits are eligible for deduction of taxable income up to Rs 1.5 lakh in a financial year. In other words, by investing in a five-year fixed deposit, individuals can avail of tax benefits up to Rs 1.5 lakh in a financial year while ensuring their funds grow steadily over time.

This makes the five-year FD a popular choice among investors looking to save on taxes while earning a stable return on their investment.

Is the interest earned taxable?

Yes, the interest earned on such FDs is treated as 'income from other sources' and is taxable as per income tax laws.