Small Savings Schemes in India

Small savings deposit schemes are trusted instruments (launched by the Government of India) to park your savings for a specified purpose.

Well, the schemes offer good returns along with safety and income tax benefits There is no doubt about getting your money back, since it carries a sovereign guarantee.

BENEFITS OF SMALL SAVINGS SCHEMES

But why are small savings schemes introduced by the government? Is it just another subsidized welfare scheme? Not really. This money goes to finance the budget deficit. It is a way of mopping up small savings to finance government expenditure.

Why should the public invest in these schemes? Investors with a low-risk appetite prefer these schemes.

Small savings interest rates are attractive compared to other fixed income schemes. But we need to bear in mind that interest rates can be reset every quarter. Unlike a bank fixed deposit, there is no guarantee that the interest rate will remain the same till maturity. Hence, you need to compare rates and alignment with your financial goals at the time of investment. These schemes become particularly attractive when bank rates are low, and stocks offer moderate returns.

There is a cap on investment in each scheme. You cannot invest more than Rs.1,50,000/- in most of the schemes. Hence, there is no harm to have these investments as a part of your portfolio.

The purpose of these schemes is retirement planning and girl child education, with add-on income tax benefits. Investors can create a base for retirement or education of the girl child.

Banks hike interest rates to meet the competition offered by small savings schemes, and that becomes an added benefit. It gives investors have a wider choice of fixed income instruments.

LIMITATIONS OF SMALL SAVINGS SCHEMES

There is a ceiling on most of the investments. You can invest only a certain amount in a financial year.
There is a minimum annual deposit to keep the account active.
The government can change the interest rate every quarter, so there is no guaranteed rate of return.
Certain schemes do not allow premature withdrawal.
You need to visit the post office or a designated bank branch to open the account.

But times are changing, and online options are increasing.

You can open a Post Office Savings Account online through the India Post Payment Bank app. Just bear in mind that all accounts opened digitally are valid for twelve months. Thereafter, or before the completion of one year, the accountholder needs to complete full KYC.

Banks offer a demand loan or overdraft limit on small savings instruments, up to 90% of the principal. It compensates for the lock-in period of funds. The lock-in period is justified, since the investments qualify for income deduction under Section 80C of Indian Income Tax Act.

1. Sukanya Samriddhi Yojana

The scheme is open for maximum two girl children in a family below the age of 10 years, unless they happen to be twins or triplets. One can provide necessary certificates for multiple birth, to avail the benefit for more than two children.

SSY attracts EEE benefit. It means that the principal amount, interest and maturity proceeds are all exempt from income tax.

Parents need to deposit minimum Rs.250/- and maximum Rs.1.5 lakhs in a year, in a single account.

The tenor of the deposit is 21 years, or till the girl gets married after the age of 18 years.

2. Public Provident Fund (PPF)

80% of urban Indians are not fully prepared for retirement, as per an Economic Times report in 2021. The reasons quoted caused quite a stir. A large majority of Indians believe that children will look after them, or that family wealth will help them tide over their senior years.

Public Provident Fund locks in funds for 15 years. You can seek extension of the account in blocks of five years after that.
One can deposit minimum Rs. 500/- and maximum Rs.1.5 lakhs in a year. An individual can open only one account across the country.
Banks allow Loan against PPF, premature closure, withdrawal of money subject to terms and conditions.
Legal heirs need to close the account after death of the accountholder.
Non-resident Indians cannot invest in this scheme, though the account can continue till maturity.
Tax deduction under Section 80C is available.

3. National Savings Certificate

The oldest scheme popularly used to claim income tax benefits is the National Savings Certificate, popularly known as NSC. You can start with a minimum investment of Rs.1000/-.

Banks provide a loan against NSC, but the lock-in period for 5 years till maturity remains.

The interest rate does not change during the tenor. Both principal and interest (compounded and reinvested) are eligible for tax deduction under Section 80C.

4. Kisan Vikas Patra

Kisan Vikas Patra offers fixed returns and doubles the money in 124 months. One can opt for premature closure after 30 months. Loans against KVP are available.

There is no ceiling on investment in the scheme.

The investment and interest earned are not eligible for a tax deduction or an exemption.

5. Senior Citizen Savings Scheme

This scheme is open to

● individuals above 60 years of age

● People who retire between 55-60 years of age, and defence staff between 50-60 years of age, subject to the condition that the account is opened within a month of terminal benefits.

It offers quarterly interest, and the maximum amount of deposit allowed is Rs. 30 lakhs for a tenure of 5 years. You can extend the account for another three years after maturity of the deposit.

If the account holder dies, the spouse can continue the account, if s/he does not hold another SCSS account.