An annuity deposit scheme is a type of fixed deposit that allows the depositor to pay a one-time lump sum amount and receive monthly payments that include a part of the principal amount and interest. The interest is calculated on the reducing principal amount, compounded at quarterly rests and discounted to the monthly value. Today, in this article, we will look at the benefits, some bank offers, risk, and alternatives to Annuity deposit scheme.
Benefits of Annuity Deposit Scheme

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An annuity deposit scheme offers several benefits to the depositor, such as:
- It provides a regular and guaranteed income for a fixed period of time, which can be useful for meeting monthly expenses or planning for retirement.
- It offers a fixed rate of interest that is comparable to other term deposits for the same period. The interest rate is also higher for senior citizens.
- It allows the depositor to choose from different tenures ranging from 36 months to 120 months, depending on their needs and preferences.
- It does not have an upper limit on the deposit amount, but the minimum deposit amount is based on the minimum monthly annuity of Rs. 1000 for the relevant period.
- It offers the facility of nomination, transferability, premature payment (in case of death of depositor), and loan (up to 75% of the balance amount) in certain cases.
Some Annuity deposit options in India:
Some of the banks that are offering annuity deposit scheme in India are:
State Bank of India (SBI): It offers interest rates as applicable to term deposits for public and senior citizens. The current interest rates range from 2.9% to 5.4% for general citizens and from 3.4% to 6.2% for senior citizens, depending on the period of deposit.

Bank of India: It offers a special fixed deposit scheme called Shubh Arambh, which provides monthly interest payments to senior citizens. The current interest rate is 7.4% for super senior citizens (above 80 years) and 7.15% for senior citizens (above 60 years) for deposits of 5 years and above.
HDFC Bank: It offers interest rates as applicable to term deposits for public and senior citizens. The current interest rates range from 3% to 6.25% for general citizens and from 3.5% to 6.75% for senior citizens, depending on the period of deposit.

Bank of Baroda: It offers interest rates as applicable to term deposits for public and senior citizens. The current interest rates range from 2.9% to 5.3% for general citizens and from 3.4% to 5.8% for senior citizens, depending on the period of deposit.
ICICI Bank: It offers interest rates as applicable to term deposits for public and senior citizens. The current interest rates range from 2.5% to 5.5% for general citizens and from 3% to 6% for senior citizens, depending on the period of deposit..

Some of the risks involved in annuity deposit schemes are:
Low liquidity: Annuity deposit schemes have a fixed tenure and do not allow premature withdrawal except in case of death of the depositor. This means that the depositor cannot access their funds in case of an emergency or a better investment opportunity.
Tax liability: Annuity deposit schemes are subject to tax deducted at source (TDS) on the interest earned. The interest income is also added to the depositor’s taxable income and taxed as per their slab rate. This reduces the effective returns from the scheme.
Lower returns: Annuity deposit schemes offer a fixed rate of interest that is comparable to other term deposits for the same period. However, this may not be enough to beat inflation or generate higher returns than other alternatives such as mutual funds, stocks, or bonds.
Limited upside: Annuity deposit schemes do not offer any benefit from the market fluctuations or the performance of the underlying assets. They also have a cap on the maximum deposit amount and the monthly annuity payment. This limits the potential growth of the depositor’s wealth.
Mortality risk: Annuity deposit schemes are based on the assumption that the depositor will live for a certain period of time and receive the monthly payments. However, if the depositor dies before the end of the tenure, they may lose out on some of the benefits of the scheme. For instance, if the depositor dies after receiving only a few payments, they may not get back their full principal amount or earn any interest on it.
Alternatives to Annuity Deposit Scheme:

An annuity deposit scheme is not the only option for getting a regular income from a lump sum investment. There are other alternatives that can also provide similar or better benefits, such as:
Immediate Annuity Plans: These are insurance plans that offer a lifetime income to the policyholder after paying a single premium. The policyholder can choose from different payout options, such as monthly, quarterly, half-yearly, or yearly. The income is tax-free and depends on factors such as age, gender, premium amount, and annuity option.
Systematic Withdrawal Plans: These are mutual fund plans that allow the investor to withdraw a fixed or variable amount from their investment at regular intervals. The investor can choose the frequency, amount, and duration of withdrawal. The income is subject to capital gains tax and depends on factors such as fund performance, market conditions, and withdrawal rate.
Post Office Monthly Income Scheme: This is a government-backed scheme that offers a fixed monthly income to the depositor for a period of 5 years after investing a lump sum amount. The interest rate is revised quarterly and is currently 6.6% per annum. The income is taxable and subject to TDS. The maximum deposit amount is Rs. 4.5 lakh for single account and Rs. 9 lakh for joint account.
Conclusion
An annuity deposit scheme is a suitable option for those who want to get a regular and guaranteed income from a lump sum investment for a fixed period of time. It offers a fixed rate of interest that is comparable to other term deposits and higher for senior citizens. It also offers flexibility in choosing the tenure and deposit amount. However, it also has some drawbacks, such as low liquidity, tax liability, and lower returns than other alternatives. Therefore, before opting for an annuity deposit scheme, one should compare it with other options and consider their financial goals, risk appetite, and tax implications.