Keeping pace with this, banks have slashed their deposit rates across several tenures during this period. Over the last year, a vast majority of banks have introduced rate cuts of 15bps to 125bps on their 1- to 3-year fixed deposits (FDs) as per BankBazaar.com data. Interest rates on small savings schemes have, however, remained unchanged since January 2024.
Here we highlight a few debt products, some for parking your short-term money, while others are for serving your long-term goals, such as retirement. Some of these products are also attractive from a taxation perspective.
Bank FDs for low-tax bracket individuals
As of 12 December, public sector banks were offering 6.15-6.70% per annum (p.a.) on their 1-to-2-year FDs and 5.9-6.5% p.a. on their 2-to-3-year deposits, showed BankBazaar.com data. Leading private-sector banks are offering 6.4-6.7% for comparable tenure FDs.
Is this a good time to lock in the current rates? Yes, according to Mrin Agarwal, director at finance education organization Finsafe. “FDs can be used for parking money for short-term purposes. They are a good option for someone who wants a regular income flow. Such people can consider locking into some FDs now.”
That said, it’s best to limit the allocation to FDs unless you fall in the low- or zero-tax brackets. Interest from FDs is taxed at your slab rate.
FDs can form part of one’s short-term debt portfolio, but they are not ideal as a core holding due to their lower post-tax yields compared to debt funds, according to Abhishek Kumar, founder, Sahaj Money, and a Securities and Exchange Board of India (Sebi)-registered investment adviser (RIA).
Good picks among small savings schemes
Interest rates on small savings schemes have, however, remained unchanged since January 2024. Such schemes include many well-known investment options, such as the public provident fund (PPF), the Sukanya Samriddhi Yojana, the Senior Citizen Savings Scheme (SCSS), and Post Office (PO) time deposits, which enjoy a sovereign guarantee.
Their rates are reviewed quarterly and are intended to be linked to government bond yields of similar tenures. But in the past, the government has often refrained from revising them downwards. As a result, they currently offer relatively better returns than bank FDs.
S.R. Srinivasan, founder of SriNivesh Advisors and a Sebi RIA, however, doesn’t usually recommend PO deposits. “Their interest rates are not significantly different from those of bank FDs. So, they may not be worth the hassle of investing through the Post Office. But the 5-year senior citizens savings scheme offering a significantly higher 8.2% is worthwhile for senior citizens,” said Srinivasan.
Bank FDs score over PO time deposits on ease of investing. You can easily open a bank FD online, even if you are not a customer of that bank. However, you must visit a post office to make a time deposit, unless you already have a PO savings account (which requires a physical visit) and have activated online banking.
All advisers we spoke with highly recommend investing in the PPF as part of one’s core long-term debt portfolio. The PPF currently offers a tax-free 7.1% p.a. and comes with a 15-year lock-in.
“The PPF is one of the finest long-term fixed income products, even without the ₹1.5 lakh 80 C tax deduction that is not available under the new tax regime. It’s difficult to find a debt product that gives you a tax-free 7.1%,” said Deepesh Raghaw, founder, PersonalFinancePlan.in and a Sebi RIA.
Similarly, the Sukanya Samriddhi Yojana (SSY), that offers a tax-free 8.2% is a very good long-term investment option for those with a girl child. The SSY account matures after 21 years from the date of account opening.
Both the PPF and the SSY allow for premature withdrawals for specific reasons. You can invest in the PPF, SSY, and the SCSS via a post office or one of the designated banks.
Debt funds and other tax-efficient funds
There are options in the mutual fund space that one can consider for their short-term needs of up to three years. But with capital gains from debt funds bought on or after 1 April 2023 being taxed at an individual’s tax slab rate, irrespective of the holding period, these funds lost their tax advantage.
Prior to the adverse tax change in 2023, debt funds (holding 65% or more in debt) enjoyed a more favourable tax rate of 20% with indexation benefit if held for more than three years. This made debt funds a suitable option, especially for those in the higher tax brackets.
In response to the tax changes, many fund houses launched income plus arbitrage fund of funds (FoFs) in 2025, either as new schemes or restructured versions of their existing schemes. These FoFs invest less than 65% of their corpus in debt funds and debt instruments and at least 35% in arbitrage funds.
Income plus arbitrage FoFs, along with arbitrage funds, then became better alternatives to debt funds. While providing debt fund-like returns as the equity exposure in arbitrage funds is completely hedged through derivatives, they give investors the benefit of lower taxation. Given their short history, these FoFs, however, don’t have a performance track record yet. Arbitrage funds are classified as equity funds (holding 65% or more in equity) and are taxed accordingly (see the graphic for tax details).
That said, debt funds may still be suitable for individuals with lower incomes. Under the new tax regime, those with incomes of up to ₹12 lakh (those with income from business and profession) and ₹12.75 lakh (for salaried individuals) a year do not have to pay any tax. Capital gains from debt funds are included under this limit.
Also, debt funds can still be beneficial in one way. “When people are in the accumulation stage (saving and investing money to build a corpus), especially those in the 20% or higher tax bracket, they don’t want interest income on which tax will have to be paid year after year. So, debt funds or other more tax-efficient options, such as income plus arbitrage FoFs, are a better option,” said Srinivasan. You pay tax on mutual funds only on redemption.
Those with a horizon of under one year can consider liquid funds and ultra-short duration funds. Their latest one-year average return has been 6.22% and 6.71%, respectively (Value Research, direct plans). Short-duration funds can be suitable for a 1-3-year period. Their latest one-year and three-year average returns have been around 7.30% and 7.15%, respectively.
Short- and long-term needs
To summarize, those in the zero or lower income tax brackets can use bank FDs and debt funds with shorter duration for parking short-term money. For others, arbitrage funds and income plus arbitrage FoFs are more tax efficient.
For the long term, the PPF, and the SSY and the SCSS, where applicable, are very good options. Those in the zero or lower-tax brackets can also choose from short-duration funds (for up to three years) and other categories such as corporate bond funds (above three years). Corporate bond funds must invest 80% or more of their corpus in AA+ or higher-rated bonds, making them a safe bet on credit quality.
While those in the higher tax brackets can opt for hybrid funds (invest in a mix of debt and equity) to avoid debt fund taxation, this will affect their overall debt allocation and may not always be advisable.
Finally, remember to include your EPF (employee provident fund) balance in your long-term debt allocation.
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