The once hugely popular investment option of Post Office Monthly Income Scheme has been losing its shine since February, 2006 primarily due to the removal of 10% bonus on maturity clause.
The scheme at that time was offering 8% interest payable monthly without any TDS but with rising interest rates and special deposit schemes of banks offering attractive rates, the POMIS option was turning unpopular. But w.e.f. December 8, 2007 the government has reintroduced the bonus option on maturity in the scheme but a lower rate of 5%.
With the reintroduction of bonus, the yield for a 5 year Post Office MIS has increased from 8.9% to 8.3%. Together with the bonus, the effective yield will be 8.9% as against 8.3% previously available under the scheme.
Also, the government has made 5-year Post Office Term Deposits (7.5% interest) and Senior Citizen Savings Scheme (9% interest) eligible for 1-lac benefit under Section 80C.
But for investors the question remains as to whether the PO MIS is attractive compared to other investment options like Bank Fixed Deposits and small saving schemes such as NSC, PPF?
The answer to this would depend on various factors. When compared to the time period of investment, similar Bank FDs attract higher interest rates and are equally safer to invest. But opening an account in Post Office is much simpler with lesser formalities and the biggest strength is its wide network around the country.
Another drawback with MIS option is that since Post Offices are not that technologically advanced in India, as such one needs to go and collect the monthly income from the Post Office and there is no option of directly crediting the income every month or making an automatic Recurring Deposit out of the interest amount. Banks continue to score on such points.
And there are likely option of banks raising their deposit rates fearing again the chances of reduced interest in POMIS. For higher tax bracket individuals, PPF continues to remain a better option as the interest is tax-free though it has a longer duration.
But going by Government’s move, it is clear that in future Exempt Exempt Taxed (EET) system would hold as investments are initially given tax benefits while on maturity the amount would be taxed fully.