Popular Small Saving Schemes: Options in Debt Asset Class

The Indian Government has instituted a number of small saving schemes to encourage investors to save regularly. The main attraction of these instruments is the implicit guarantee of the government, which is the borrower. Another advantage is that most of these schemes are eligible for deduction under 80C of the Income tax act. These schemes are offered through the post office and selected bank.

The saving schemes currently offered by the Government are:

Public Provident Fund (PPF)Current interest rate: 7.1%

Tenure: 15 years

Eligible for deduction under 80C of the Income Tax Act. : Yes

Instituted in 1968, the objective of the PPF account is to provide a long term retirement planning to the investors. It can be opened in a designated post office or a bank branch. It can also be opened online with few banks. A person of any age can open a PPF account; even those with an EPF account can open one. PPF is considered as the best tax-effective investment vehicle for long term wealth creation. It is backed by Government so returns and principal are sovereign guaranteed. PPF is one investment vehicle that falls under the Exempt-Exempt-Exempt (EEE) category. This, in other words, means that all deposits made in the PPF are deductible under Section 80C of the Income Tax Act. Yearly interest earned on the account is tax-free and the accumulated amount is also exempt from tax at the time of withdrawal.

PPF is considered as a best Debt retirement option for its mandatory tenure of 15 yrs. It can be continued for further blocks of 5 years. The minimum contribution required in PPF is 500 rs and maximum contribution allowed is 150000 rs per financial year. Subscription should be in multiple of 5. Lump sum payment or a maximum of 12 deposits can be made in a single financial year in this account. A joined account cannot be opened however nomination facility is available.

The account can be opened with just Rs 100.

Interest is calculated on the lowest balance available in the account between 5th of the month and the last day of the month. So it is advisable to deposit in PPF account on or before 5th of every month. The current interest rate is 8% (for the quarter April to June 2019) that is compounded annually. The finance ministry announced the rate of interest of PPF account on a quarterly basis.

National Saving Certificate (NSC)

Current interest rate: 6.8%

Tenure: 5 years

Eligible for deduction under 80C of the Income Tax Act. : Yes

National Saving Certificate (NSC) is issued by the government and available for the purchase at the box office. NSCs are issued for the tenure of 5 years. Interest is compounded annually and accumulated and paid on maturity. The certificates can be bought by individuals on their own account or on the behalf of minors. Joint holding is allowed. Unlike PPF there is no upper limit for investing in NSCs. The minimum contribution is Rs 100. The certificate can be bought by cash or through cheques or demand drafts.

The investment made in NSC enjoys tax benefits under section 80C. Accrued interest is taxable, but it is deemed to be reinvested and therefore the interest become eligible for section 80C benefits. It means

Suppose you buy NSC worth Rs 50,000 and claim a tax deduction this year. The following year, you can claim a deduction for the Rs 3,900 that accrues as interest in the first year. In the third year, you can claim a deduction for Rs 4,204 as interest gets compounded.

Premature encashment is allowed only in case of death of the holder, forfeiture by a pledgee or under the orders of the court of law. These certificated are also accepted as collateral for taking a loan. Government has recently enabled holding NSCs in demat format.

Senior Citizens’ Saving Scheme (SCSS)

Current interest rate: 7.4%

Eligible for deduction under 80C of the Income Tax Act. : Yes

Eligible for deduction under 80C of the Income Tax Act. : Yes

This is one of the best product for retirees from the Government of India. This scheme is popular with senior citizens. It is a saving product available for 60 yrs. and above. Proof of age and photograph of an account holder is required at the time of opening of an account. The age limit is reduced to 55 years in case of an individual retiring on superannuation or otherwise, or under VRS or special VRS. There is also no age bar for defense personnel.
 The account can be opened in any post office or in the designated bank. The scheme can be held in an individual capacity or jointly with the spouse. The age restrictions apply only to the first holder. The term of the scheme is 5 years. A one-time extension of 3 years is allowed if applied within one year of its maturity. Maximum limit of investment is Rs. 15 lakhs. Nomination facility is available.

The interest rate applicable on the scheme is announced on a quarterly basis. The benefit of section 80C is available on investment but interest is fully taxable.

The Senior Citizens’ Savings Scheme should be the first option for retirees looking to park their life savings. Interest offered by SCSS is higher and returns are guaranteed. It can be combined with bank FDs or post office monthly saving scheme.

Sukanya Samriddhi Yojana :

Current interest rate : 7.6%

Tenure: The account will remain operative for 21 years from the date of its opening or till the marriage of the girl after she turns 18.

Eligible for deduction under 80C of the Income Tax Act. : Yes

Sukanya Samriddhi Yojana is a scheme launched for the benefit of the girl child. The account will be opened in the name of the girl child by a natural or legal guardian. A Sukanya Samriddhi Account can be opened any time after the birth of a girl till she turns 10, with a minimum deposit of Rs 1,000. In subsequent years, a minimum of Rs 1000 and a maximum of Rs 1.5 lakh can be deposited during the ongoing financial year. Accounts can be opened in any post office or designated banks. A parent can open an account for a maximum of two daughters, but the combined investment in the two accounts cannot exceed Rs 1.5 lakh in a year.

The account will mature on the completion of 21 years from the date of opening of the account. If the girl child gets married before the completion of 21 years the account will be closed. Partial withdrawal is allowed after the holder attains 18 years of age, to the extent of 50%of the amount in balance at the end of the preceding financial year. The amount deposited in the account is eligible for deduction under section 80C of Income-tax Act up to the limit of 1.5Lakhs

The higher rate of interest being offered in SSA makes it a preferred choice while comparing it with PPF. The interest rate under the scheme is moreover linked with government bond yield. The SSA would give 50 basis points greater than the yield for 10-year government bonds. Currently, SSY offers the highest tax-free return with the sovereign guarantee and comes with the exempt-exempt-exempt (EEE) status

Post Office Monthly Income Scheme(POMIS)

Current interest rate: 6.60%

Tenure: 5 yrs

Eligible for deduction under 80C of the Income Tax Act. : No

The Post Office Monthly Income Scheme (POMIS) is a Government of India backed a small savings scheme that allows the investor (s) to set aside (save) a specific amount every month. Subsequently, interest is added to this investment at the applicable rate and paid out to the depositor(s) on a monthly basis.

The Post Office Monthly Income Scheme will earn interest of 7.7% for the April quarter. An investor can open multiple accounts in his name, subject to the upper limit of Rs 4.5 lakh in a single account and Rs 9 lakh in a joint account. Post Office Monthly Income Scheme does not offer any tax rebate on the investments or maturity amount. The scheme offers liquidity to the investor allowing premature withdrawals after one year, but with a penalty.

Premature withdrawals after one year attract 2% deduction on the deposit and a nominal 1% after.

Post Office Monthly Income Scheme account can continue to earn interest for up to 2 years after account maturity if proceeds are not withdrawn by the investor. The applicable rate will be the same as that of a standard Post Office savings account.

Kisan Vikas Patra (KVP)

Current interest rate: 6.9%

Tenure: 112 months

Eligible for deduction under 80C of the Income Tax Act. : No

The KVP can be purchased by an adult for self or by two adults for a minor investor. It can be purchased by any post office or bank through cash, cheque or DD. The minimum investment is Rs 1000 and there is no maximum limit. The amount of KVP can be withdrawn after 112 months. The effective interest rate is announced on a quarterly basis. The certificate can be encashed prematurely after the lock-in period of 2 and a half years from the date it was initially issued.

The facility of nomination and joint holding is available. There is no tax incentive for the investment made and interest earned is taxed on an accrual basis. These are the most famous small saving instruments in India. Apart from these Post office offers Post Office Time Deposits (POTD) and Post Office Recurring Deposit. Government of India has also launched the Sovereign Gold Bonds Scheme 2015 and Gold Monetization Scheme 2015 for using gold in more productive ways. The investor should take benefits from all the above-mentioned schemes.

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