At a time when banks are not giving more than 8.5 per cent interest on fixed deposits above five years, investors can still earn around 9 per cent return from the Post Office Monthly Income Scheme (POMIS).

The small savings scheme, once fancied by retired people, lost its shine after February 2006 when the government withdrew the 10 per cent bonus paid on maturity of the account. However, from November last year, the bonus has been re-introduced, though reduced at 5 per cent.

This increases the return from a POMIS. If one knows how to use the monthly interest income from a POMIS account to one’s advantage, one can beat the returns from a bank fixed deposit.

The beginning

First open a POMIS account with a post office close to your home. The scheme gives a simple interest of 8 per cent per annum and a 5 per cent bonus on the initial investment on maturity after six years.

To calculate the monthly interest income from the POMIS account, multiply the initial investment with the interest rate of 8 per cent and then divide it with 12. For example, if you invest Rs 1,00,000 in a POMIS, your monthly interest income will be Rs 8,000/12, or Rs 666.67.

Recurring delight

Next month open a recurring deposit account with a monthly instalment equivalent to your interest income per month from the POMIS account. While opening the recurring deposit account, ask the post office to credit the monthly interest from the POMIS account to the recurring deposit account. By doing this you ensure that your interest income from the POMIS account goes straight to the recurring deposit account and earns an interest of 7.5 per cent per annum at least for five years.

A post office recurring deposit is a five-year scheme and gives an interest of 7.5 per cent. However, on maturity of five years, the recurring deposit account can be extended for a maximum of five years. But one can extend the account for one more year to match with the maturity of the POMIS account.

With the above arrangement one can make sure that the interest income on the initial investment in POMIS account continues to grow for six years.

The result

What does one get from this arrangement after six years?

To illustrate this, let us consider an initial investment of Rs 1,00,000. The monthly interest income from the POMIS account will be Rs 666.67. Depositing Rs 666.67 every month in a post office recurring deposit account at an annual interest rate of 7.5 per cent will fetch a total of Rs 60,673 after six years.

Thus the total income on the initial investment after six years is Rs 60,673 plus Rs 5,000 (the 5 per cent bonus from the POMIS), or Rs 65,673. This amounts to a cumulative return of 8.78 per cent per month.

But if one is willing to take a little trouble and open the recurring deposit in a bank instead of a post office, one can earn an 8.99 per cent rate of return. Banks are paying 8.5 per cent interest on recurring as well as term deposits for more than five years.

At 8.5 per cent interest, one shall get Rs 62,655 on maturity of the recurring deposit after six years. The total income will thus be Rs 67,655, including the bonus from the POMIS.

On a measuring scale

Let us compare this return with other assured income schemes of similar maturity, such as bank fixed deposits and National Savings Certificate. In a six-year bank fixed deposit, one gets Rs 1,61,594 on maturity, that is, the interest income is Rs 61,594. In NSC, the interest income is even lower at Rs 60,103.22. However, NSC has a tax edge over POMIS or bank fixed deposit because it is eligible for tax benefits under section 80C of the income tax act.