With inflation at 5.10 per cent in January 2024, within the Reserve Bank of India’s (RBI) acceptable range of 4-6 per cent, it is less likely that the interest rates will rise further. So, should senior citizens go for fixed deposits (FDs) or explore government bonds?

Why Fixed-Income Instruments?

Experts stress goal-based rather than time-based investing because in the longterm, guaranteed income instruments can reap higher compounding benefits. Hence, depending on one’s financial goals, they can consider fixed-income instruments which help reduce risk and rebalance.

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What Are Government Bonds And Fixed Deposits?

Government Bonds: Government bonds (G-Secs) are issued by the central and state governments with a sovereign guarantee of returns. G-Secs can be traded in the secondary market and sold before maturity.

G-Secs with less than a year of maturity are called Treasury Bills (T-Bills), and those with more than one year of maturity are called Treasury bonds (T-Bonds). People can invest in these securities through RBI’s retail direct portal, broker, or online trading platforms. Despite their guaranteed returns, the penetration of government bonds among retailers is not as high as bank fixed deposits because of a lack of clarity and information about these instruments.

Fixed Deposits: Bank fixed deposits are the most popular investment tools among senior citizens and risk-averse individuals. FDs up to Rs 5 lakh per individual under one bank are protected under the Deposit Insurance and Credit Guarantee Corporation (DICGC). FDs in different banks are separately insured. FDs can be liquidated any time after paying a penalty, which differs from bank to bank.

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How To Decide, Which One Is Better?

While FDs are risk-free, government bonds also come with no risk because these are loans to the government. Here is what one should take into account before investing in them:

Return On Investment: Check the interest rate offered in the FD and the bond. It is the first and foremost point to consider for comparison. The higher the rate, the better.

Maturity Period: Always consider the invested period for returns. Is the investment period meeting your investing horizon, or may there be a need for premature withdrawal? What would be the penalty, and how easy would the process be?

Flexibility Of Withdrawal: Easy liquidity is the most vital feature of FDs. Government bonds are also flexible. These can be traded in the secondary market, or loans can be taken against them in an emergency.

Taxation: Interest earned in T-Bills and bonds are taxed as per one’s slab rate, similar to interest received from FDs. There is no TDS on interest on G-Secs, whereas, in FDs, one must provide Form 15G or 15H to the bank to deduct TDS.

In short, in the fixed-income space, both FDs and bonds have unique features with guaranteed returns. You can decide what suits you best based on your risk appetite and preference.

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