SMALL SAVING

Description

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Context

Earlier the government had kept interest rates on small savings schemes, including Public Provident Fund (PPF) and National Savings Certificate (NSC), unchanged for the first quarter of 2022-23 due to an elevated level of inflation.
But now households could get some relief as economists expect the government to raise the interest rates paid on small savings schemes for the July to September 2022 quarter.

What are small savings scheme?

Small Savings Schemes are a set of savings instruments managed by the central government with an aim to encourage citizens to save regularly irrespective of their age.
They provide returns that are generally higher than bank fixed deposits and they come with a sovereign guarantee.
These schemes, which are launched by the government, banks, and public sector financial institutions, offer attractive rates of interest and tax exemptions/benefits on investment.

Interest Rates

Since 2016, the Finance Ministry has been reviewing the interest rates on small savings schemes on a quarterly basis.
These administered interest rates are linked to market yields on government securities (G-secs).

Funds under Small Savings Scheme

All deposits received under various small savings schemes are pooled in the National Small Savings Fund.
The NSSF is administered by the Government of India, Ministry of Finance under National Small Savings Fund Rules, 2001, which is derived from Article 283(1) of the Constitution.
Funds collected under SSS are the liabilities of the Union government accounted for in the Public Accounts of India.
The money in the fund is used by the central government to finance its fiscal deficit.

Why are Small Savings Schemes important?

These schemes guarantee good returns with minimal risk and volatility.
They can be opened in a variety of ways and start with – monthly, quarterly, half-yearly and yearly schemes.
Some of these schemes also are tax-saving instruments.

Types and sub-types of Small Savings Schemes

Post office deposits

Savings deposit
Recurring deposit and
Time deposits

Savings certificates

National Savings Certificate
Kisan Vikas Patra.

Social security schemes

Public Provident Fund,
Sukanya Samriddhi Account
Senior Citizens Savings Scheme.

1. Post office deposits

Post Office Savings Account

It is like a savings account with a bank, except that it is held in a post office. A Post Office Savings Account is highly liquid and can be withdrawn any time.
The minimum balance for non-cheque accounts is Rs 500 with no upper limit.
An individual can open only one account. Individuals can open a single account or joint account.
A guardian can open an account on behalf of a minor or a person of unsound mind.
Also, a minor above the age of 10 can open an account.
The minimum withdrawal amount is INR 50. However, the account holders should maintain a minimum balance of INR 500 at all times.
The post office will charge a minimum balance fee of INR 100. And if the account balance goes to zero, the account will remain close.
Investment in a post office savings account doesn’t have any tax benefits.
Also, the interest income is taxable as per the individual’s income tax slab rates.
However, under Section 80TTA of the Income Tax Act, 1961, the interest up to INR 10,000 is exempted from tax.

Post Office Recurring Deposits

It lets people with regular savings to deposit a fixed amount every month for a tenure of five years and earn returns at fixed deposit rates. The minimum account required to be paid every month is Rs 100.
All resident Indian nationals above 18 years can open an account with the post office.
Also, minors who are ten years old and above can open and operate the account jointly with their guardian.
Furthermore, parents or guardians can also open the RD account on behalf of their minor children.
One cannot prematurely withdraw PORD investments. However, in case of emergencies, one can break the recurring deposit investment though, it comes with a penalty.

2. Savings certificates

National Savings Certificate

National Savings Certificate (NSC) is a post office savings scheme that promotes small savings.
This government of India initiative encourages investors to save tax while investing.
Since the government backs it, the returns are guaranteed. The interest is revised every quarter.
The tenure of the investment is five years, and hence the lock-in period is also five years.
The interest earned from the scheme is automatically reinvested into the scheme.
NSC doesn’t allow any premature withdrawals, except in the case of death of the investor.
One can use NSC as collateral and take a loan against it.
Investment in NSC qualifies for tax saving under Section 80C of the Income Tax Act, 1961. Investors can claim deduction up to INR 1.5 lakhs per annum while filing their income tax returns.
The interest income is taxable and is added to the individual’s income. The interest is taxable at the applicable income tax slab rate.

Kisan Vikas Patra

It is a small savings instrument that was introduced by India Post in 1988 to facilitate people to invest in a long-term savings plan.
Initially, it was meant for farmers to enable them to save for long-term, and hence the name. Now it is available for all.
The minimum investment amount is Rs. 1000 and there is no upper limit.
To prevent the possibilities of money laundering, the government in 2014 made PAN Card proof compulsory for investments above Rs. 50,000.
To deposit Rs. 10 lakhs and above,one must submit income proofs (salary slips, bank statement, ITR document etc.).
Further, it is also mandatory to submit AADHAAR number as proof of identity of account holder.

3. Social security schemes

Public Provident Fund

The Public Provident Fund is a post office savings scheme launched by the National Savings Institute in 1968.
The minimum investment in PPF is INR 500 per annum.
And the maximum investment is INR 1,50,000 per annum.
The tenure of PPF investment is 15 years.
The Ministry of Finance decides the interest rate on PPF at the start of each quarter.
Investors cannot open multiple PPF accounts, and investors can invest in a lump sum or monthly instalments.
Also, the PPF account is transferable from one post office to another.
PPF investment has a lock-in of 15 years, and the investment can be extended by another five years.
Only Indian citizens can invest in PPF and HUFs, and NRIs cannot avail the benefits of this scheme.
Investment in PPF qualifies for tax deduction under Section 80C of the Income Tax Act, 1961. Investors can claim tax exemption up to INR 1,50,000 while filing their income tax returns.
Moreover, the interest income and the maturity amount is exempted from tax as well.

Senior Citizens Savings Scheme

The Senior Citizens Saving Scheme or SCSS is a government-backed investment scheme for senior citizens above the age of 60.
Individuals who are aged between 55 years and 60 years and have opted for Voluntary Retirement Scheme, can also avail its benefits.
Under this scheme, the minimum investment amount is Rs 1,000 and the multiples, thereafter, should not exceed Rs 15 lakh.
Investments into SCSS qualify for tax exemption under Section 80C of the Income Tax Act, 1961.
However, the interest income from the scheme is taxable.
Also, TDS is deducted in case the interest income is more than INR 50,000.
SCSS investors can withdraw their investments prematurely. However, these withdrawals come with penalties.
The penalty varies on the basis of the account tenure.
Note: Only after one year of account opening, the investors are eligible to withdraw their investments prematurely.
In the case of death of the depositor before the maturity, the account will be closed. However, the nominee will receive the proceeds from the SCSS account.

Sukanya Samriddhi Account

Sukanya Samriddhi Yojana (SSY) is an initiative to support the ‘Beti Bachao Beti Padhao Campaign’.
The scheme was launched in 2015 as one of the post office savings schemes for a girl child.
This scheme is a fixed income savings scheme and also guarantees returns.
A girl child’s parents can open a Sukanya Samriddhi account from the age of 0-10.
Only one Sukanya Samriddhi account per girl child is allowed.
The maximum number of accounts allowed per family is two.
The minimum investment in SSY is INR 250 and maximum are INR 1,50,000 per annum.
The parents or legal guardian is supposed to invest in the scheme until the girl child turns 15 years.
At the age of 18, the girl child can take control of her account. And she can withdraw 50% of the amount for higher education at the age of 18. And the scheme will mature when she turns 21.
Investment in SSY qualifies for tax deduction under Section 80C of the Income Tax Act, 1961.
Moreover, the returns and maturity amount are also exempt from tax. Hence SSY falls under EEE category (Exempt Exempt Exempt).
Premature withdrawals are allowed if the girl is suffering from a life-threatening disease or unfortunately dies at an early age.
The scheme will mature only when the girl turns 21. Hence the scheme doesn’t allow any premature withdrawals or closure.