Did you know? Post Office fixed deposits are 100% sovereign backed

Fixed deposits (FDs) continue to be the most popular financial investment for most Indians due to capital protection and assured returns. However, they operate differently across institutions. Post Office fixed deposits differ from bank deposits in a number of ways, including interest rate, tenure etc.

There’s another key difference in how these FDs are secured. Bank FDs offer protection differently than Post Office FDs.

In case of deposits held at Post Offices, the instrument carries a sovereign guarantee and enjoys the highest level of safety. Both principal and interest are fully covered. This means that in the event of any loss, the government will be liable to compensate the depositor.

Bank deposits, on the other hand, are protected by Deposit Insurance Credit Guarantee Corporation (DICGC), which extends limited coverage of up to ₹5 lakh per depositor per bank, irrespective of the deposit amount. Under this insurance guarantee scheme, your total balance with a bank i.e. including savings account, recurring deposit etc. are covered up to ₹5 lakh,

Therefore, if your deposits at any given time exceed ₹5 lakh then your insurance cover remains capped at ₹5 lakh.

In contrast, FDs or term deposits at the Post Office offer complete safety, implying that both the principal and interest amount are completely secure.

Understanding the difference with an example

For instance, if you hold a fixed deposit of ₹50 lakh at a Post Office, both the principal and the interest on it are backed by a sovereign guarantee.

In comparison, if you hold a ₹50 lakh fixed deposit with a bank, DICGC insurance covers deposits only up to ₹5 lakh per depositor per bank. Any amount above this limit is not covered by deposit insurance and would be at risk in the unlikely event of the bank's failure.

What should investors do?

Investors can spread their FDs across several banks as DICGC coverage applies on a per-depositor, per-bank basis. Keeping FDs at several banks can therefore enhance protection. Further, highly conservative investors may prefer Post Office FD over a bank deposit as they offer the highest level of protection for both principal and interest.