Post Office Time Deposit: Does the change in interest rate affect existing FDs?

No. A change in Post Office Time Deposit or Fixed Deposit interest rate does not affect the existing accounts. However, new accounts are affected based on whether the interest rate has been increased or decreased.

How does the Post Office Time Deposit interest rate work?

The Finance Ministry declares the Post Office Time Deposit interest rate every quarter. The National savings Time Deposit Scheme, 2019 says the following about interest payment:

"Interest shall be compounded on quarterly basis and payable to the account holder at the end of each year during the period of deposit."

Under the Post Office Time Deposit scheme, you can invest like a bank fixed deposit but only in four tenures:

• 1 year

• 2 year

• 3 year

• 5 year

The scheme pays after the completion of the deposit period.

At present, the Post Office Time Deposit scheme is offering 6.9% for deposits of 1 year, 7% for two years, 7.1% for three years and 7.5% for five years.

Impact of Post Office Time Deposit interest rate hike or cut

This means:

⦁ If the finance ministry increases the Post Office Time Deposit interest rate, only new investors (or fresh deposits after account maturity/extension) will benefit from the higher rate.

⦁ Existing Post Office Time Deposit account holders continue to earn the interest rate that was in effect when they opened or extended their account.

So, if an individual has currently invested in Post Office Time Deposit at 7.5% for five years, a later rate cut will not affect his/her returns. Similarly, an increase in interest rate will also not have any effect on an existing Post Office Time Deposit account holder.

If the Finance Ministry revises the Post Office Time Deposit interest rate, then the new rate will apply to only new deposit accounts.

For an individual account holder, the Post Office Time Deposit interest rate is fixed for the entire tenure once you invest. This is different from schemes like PPF where the interest rate can change even before maturity. So, any rate hike or cut only affects new investments or renewals made after the rate change, not the existing Post Office FDs.

What this means for you:

• If you invest ₹10 lakh in Post Office Time Deposit today at 7.5%, your interest rate is locked for 5 years. It will not change even if the government raises or lowers the rate during that period.

• However, if the government announces a rate hike to 8% tomorrow, only new deposits or renewals after that date will get the higher interest rate.

• Similarly, if rates drop, existing Post Office Time Deposit accounts won’t be affected until maturity or renewal.

What should Post Office Time Deposit investors do?

Ahead of the small savings scheme interest rate announcement, Post Office Time Deposit account holders are expecting a hike in the interest rate. However, nothing can be confirmed at this time. The government may or may not increase the rate. The Post Office Time Deposit interest rate still remains better than many bank fixed deposits.

As an investor, you cannot control interest rate changes. But you can use the Post Office Time Deposit account for investing your emergency funds or the money you may need in the short-term. You can treat the Post Office Time Deposit as a debt part of your portfolio.

However, balancing your Post Office Time Deposit with other options like equity mutual funds may help you generate higher inflation-adjusted returns over the long term.