Monthly income scheme vs five-year fixed deposit: Know the pros and cons

Small savings schemes still lure investors like no other schemes. The attraction of these schemes is the fact they are guaranteed by the government and, therefore, safe and predictable. Post office monthly income scheme (POMIS) and five-year FDs are two small savings schemes which are almost identical in nature. But still, there are a few differences between them. Money9 decodes both the options.

Monthly income scheme

MIS has a fixed tenure of five years. The rate of interest of all small savings schemes including MIS is notified by the central government on a quarterly basis. As the name suggests, the interest in MIS is payable on a monthly basis, while the principal invested in paid back on maturity.

Currently, the interest rate is 6.6% per annum. One can invest a maximum of Rs 4.5 lakh in a single name or a maximum of Rs 9 lakh in the name of two.

Five-year FD

In a five-year FD the investor has a lock in period of five years just like MIS. But here the interest is quarterly generated and reinvested again along with the principal amount. If anyone withdraws some money, a certain percentage has to be paid by the investor as penalty.

Currently five-year FD in post office attracts 6.7% interest rate. This is also revised by the government every quarter.

Here we are going to discuss some common factors which might be helpful for you to decide where to park your hard-earned money.

Security

Both FD and MIS are secure and safe investment options. But in FD you will know what the exact maturity amount would be. The depositor would get that amount irrespective of the market conditions.

But in MIS, a portion of the invested amount has been reinvested in equity market, so there might be a small risk but by and large the investment is safe.

Interest rate

In FD the interest rate is fixed throughout the tenure. But in case of MIS the interest rate varies according to the rate fixed by the central government every quarter.

Currently five-year post office FD gives 6.7% annual interest, compounded quarterly and MIS gives 6.6% interest.

Payout

In FD no interim payout option is there. If anyone wishes to withdraw any amount for some emergency the person has to pay a penalty up to 3% of the total corpus.

The principal amount along with accrued interest will be paid after the maturity period of five years.

On the other hand, MIS also does not allow interim withdrawal of the corpus before the maturity of five years. If anyone still wants to withdraw, the person has to pay a penalty up to 2% depending up on the duration.

In MIS the interest earning amount is paid in monthly instalments and the principal amount would be paid after the maturity, i.e. 5 years along with last month’s interest.

Where is available

Five-year FDs are often referred to as tax saving FDs. These are available in bank and post offices. MIS is only available in post office.

Amount

There is no investment cap for five-year FD. One can invest as much as he/she can. The minimum limit of five-year FD is Rs 1,000 for all individuals.

On the other hand, one can start an MIS investment with only Rs 1,000, but one can invest a maximum of Rs 4.5 lakh in single name while a maximum of Rs 9 lakh can be deposited by joint account holders.

Tax on investment

Five-year FDs are tax exempted under section 80C of IT Act, 1961 up to a limit of Rs 1.5 lakh in a fiscal year.

But MIS does not offer any tax rebate under any section of IT Act. But the monthly interest income is fully taxable according to the person’s tax slab.

Five-year FD vs MIS

Suppose you put Rs 4 lakh in a five-year FD and MIS. In FD interest rates are compounded quarterly, and it currently fetches 6.7%. So, you can earn Rs 5.58 lakh after five years.

In MIS, you will get a monthly payout of Rs 2,188 for 60 months at the interest rate of 6.6% along with Rs 4 lakh principal amount. The total amount you would get is, Rs 2188 X 60 = Rs 1.31 lakh, i.e. Rs 4 lakh + Rs 1.31 lakh = Rs 5.31 lakh.

It is clear that in five-year FDs, the nominal gain is Rs 27,000. However, you won’t get it every month as you would get in MIS. So, the suitability of the instrument depends on the investor’s financial needs.