Post Office Savings Account: Can the 4% rate change? 5 things to know before September 30 notification

A POSA account can be opened with ₹500, which is also the minimum balance to maintain. Interest is 4% per annum, calculated annually. POSA accountholders also get a cheque book. However, there is no TDS, and savers in the old tax regime can claim a deduction of up to ₹10,000 a year on savings interest under Section 80TTA. This limit is ₹50,000 for senior citizens under Section 80TTB.

The following table shows how much interest ₹50,000 can earn in a year under POSA and Post Office Time Deposit of one and five-year tenures.

The above shows that idle money in a savings account earns barely half of what the same money can earns in a time deposit account at the post office.

The post office savings account is not part of the benchmark-plus-spread mapping that governs the other schemes. However, in comparison with the market, POSA return is often on the lower side. The three-month government securities were yielding around 5.2-5.3% in late September and six-month paper around 5.5%, well above the 4% on the savings account. One can say that POSA rate simply offers stability over a volatile market-linked product.

A hike in POSA interest would raise the government's cost on its stickiest deposits. And any cut would impact lakhs of POSA accountholders. The 4% rate has so far apparently survived for over a decade because it caters to a large number to senior citizens and users in rural areas. Moreover, the current bond turmoil should have no bearing on a rate that has seen far larger swings in the last decade. Therefore, no change should be expected.

Most large banks pay 2.5-3.5% on savings accounts. The post office's 4% is slightly better than the typical bank rate. However, money kept idle in the savings account earns far less than post office time deposits, RDs and the other small savings schemes, which currently pay between 6.7% and 8.2%.

The savings account is a floating-rate instrument. If the rate ever changes, every existing balance re-rates from the next quarter. Users should ideally treat POSA as a transit lounge of the post office system, using it to accumulate money that can be later deployed into other schemes matching their goals.