Small savings schemes are a widely-preferred investment option among small investors in India. Let’s have a look at some of these government- backed schemes that offer attractive interest rates and tax benefits.
Over the last few years, investments in small saving schemes have increased drastically. This can be attributed to the efforts taken by the government to raise its awareness and adopt attractive interest rates. Small saving schemes are savings products run by the Central and State Governments. They are mainly targeted at low- and middle-income wage earners. There are different kinds of such savings schemes available in India. In this article, we will look at the 5 most popular small savings schemes one can avail.
Public Provident Fund (PPF)
This is a long-term investment option started by the National Savings Organization (NSO). PPF allows tax benefits to be claimed under Section 80C of the Income Tax Act, 1961, up to Rs. 1.5 lakhs. Additionally, the returns are tax-free in the hands of the receiver. Interest rates on PPF are linked to government bond yields and revised on a quarterly basis.
A minimum amount of Rs. 500 can be invested. The subscriber can invest a maximum of Rs. 1.5 lakhs during a financial year. If the contribution crosses the given limit, the additional money will neither earn interest nor be eligible for rebate under Income Tax Act. Money can be invested either in a lump sum or via a maximum of 12 instalments in a year.
Sukanya Samriddhi Yojana (SSY)
This scheme is exclusively for the girl child. The SSY account can only be opened in the name of a girl child below 10 years (as on the date of opening the account). The parent or guardian will have to provide the child’s date of birth proof. A maximum of two accounts can be opened for two girls in a family. The account will run for 21 years from the date of its opening. A yearly deposit of up to Rs. 1.5 lakh qualifies for tax deduction under Section 80C of the Income Tax Act, 1961. According to rules, the interest rate of SSY will always have to be higher than that of PPF. The government fixes the interest rate for SSY on the basis of the G-sec yields.
Post Office Monthly Income Scheme (POMIS)
This is a 5-year investment scheme that can be opened in all post offices in India. POMIS holds a maturity period of 5 years, and can be owned individually or jointly (maximum - three adult holders). The maximum cap under single ownership and joint ownership is Rs 4.5 lakhs and Rs. 9 lakhs, respectively.
The interest rate on MIS is higher compared with the rate offered by banks on 5-year Fixed Deposits. This savings scheme is however not best-suited option for individuals having taxable income since there is no tax benefits. The interest pay-out is considered as a taxable income as well. There, however, is no TDS deducted on the interest amount.
National Savings Certificate (NSC)
This is a fixed income investment plan that can be opened at any post office. An individual who wants to invest in NSC shall present an application in Form 1 at a post office. NSC comes with 2 fixed maturity periods – 5 years and 10 years. While there is no maximum limit on the purchase of NSCs, but investments of up to Rs. 1.5 lakhs are eligible for tax benefits under Section 80C of the Income Tax Act, 1961.
NSC holders can pledge their certificates for taking loans from banks. Lending institutions can offer loans of up to 85-90% of the NSC value. The amount, however, will vary with changes in tenure of the certificates.
Senior Citizens’ Savings Scheme (SCSS)
This is a savings instrument that can be opened by an Indian resident of 60 years or above. Early retirees between the ages of 55 and 60 years who’ve opted for the voluntary retirement scheme or superannuation can also invest in SCSS.
An individual, singly or jointly, can open an SCSS account by investing up to Rs.15 lakhs (in multiples of Rs 1,000) only. The money invested in the scheme cannot surpass the amount one receives on retirement. Therefore, one can deposit Rs.15 lakhs or the money received as a retirement benefit, whichever is lower.
Hike in Interest Rates on Small Savings Schemes
The government recently increased the interest rates on select small savings schemes for the quarter ended December 31, 2018, by 30 to 40 basis points. Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC) and Post Office Time Deposits are some of the investment avenues that saw an increase in the interest rates.
How to Make Use of Small Savings Schemes
Small savings schemes are not only a safe and attractive investment option, they also help to mobilise resources for development. They are best-suited for conservative investors, who can use the fixed income instruments to meet their long-term needs. It must, however, be noted that some of them are illiquid, therefore avoid putting all the funds only into fixed income products. Before deciding which avenue to park money in, compare the investment options on the basis of their features and benefits. To make the most out of small savings instruments, look at the asset allocation and find out how much one will need in the fixed income category. It is also advisable to check which offers the best return on investment plan as this helps the user to make an informed decision.
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