Small Savings Schemes/Instruments

  • March 31, 2022
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Small Savings Schemes/Instruments

Subject: Economy

Section: Banking

Context:

The government is unlikely to raise small savings rates for the coming quarter.

The interest rate on small savings instruments is reset every quarter, based on market yields on government securities (G-secs) with a lag, at a spread ranging from 0-100 basis points over and above yields of comparable maturities.

However, political factors also influence the rate change. The Shyamala Gopinath panel (2010) constituted on the Small Saving Scheme had suggested a market-linked interest rate system for small savings schemes.

Concept:

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 are popular as they not only provide returns that are generally higher than bank fixed deposits but also come with a sovereign guarantee and tax benefits.

All deposits received under various small savings schemes are pooled in the National Small Savings Fund. The money in the fund is used by the central government to finance its fiscal deficit.

Types:

They are of two types viz fixed-rate products and variable products.

  • Fixed rate product-The interest rate at the start of the investment will continue to be the same until the maturity of the bond.
  •  Variable-rate investment scheme-the interest on the final corpus changes as per the new rate

The schemes can be grouped under three heads – Post office deposits, savings certificates and social security schemes.

  • Post Office Deposits we have the savings deposit, recurring deposit and time deposits with 1, 2, 3 and 5 year maturities and the monthly income account.
  • Savings Certificates includes the National Savings Certificate and the Kisan Vikas Patra.
    • The National Savings Certificate is a fixed income investment scheme. This NSC initiative is launched to promote small saving habits in the general public. This is a less risk-oriented product that offers a fixed interest that is currently at 6.8% per annum for a 5 year period.

NSCs are available in 2 fixed maturity periods – 5 years and 10 years. There is no maximum limit on the purchase of NSCs, but only investments of up to Rs 1.5 lakh can entitle you a tax exemption under Section 80C of the Income Tax Act, 1961.

  • The Kisan Vikas Patra, which is open to everyone, doubles the one-time investment at the end of 124 months signifying a return of 6.9% compounded annually. The minimum investment amount is Rs 1000 while there is no upper limit.
  • Social Security Schemes include Public Provident Fund, Sukanya Samriddhi Account and Senior Citizens Savings Scheme.
    • The Public Provident Fund is a government-supported savings scheme. It is open to everyone – unemployed, employed, self-employed or even retired. It is not mandatory and anyone can contribute any amount to the PPF subject to a minimum of Rs 500 and a maximum of Rs 1.5 lakh per year. PPF is different from EPF. EPF is mandatory in nature while PPF is optional. PF is the popular name for EPF or Employees’ Provident Fund.
    • The Sukanya Samriddhi Account was launched in 2015 under the Beti Bachao Beti Padhao campaign exclusively for a girl child. The account can be opened in the name of a girl child below the age of 10 years. The scheme guarantees a return of 7.6% per annum and is eligible for tax benefit under Section 80C of the Income Tax Act. The tenure of the deposit is 21 years from the date of opening of the account and a maximum of Rs 1.5 lakh can be invested in a year.
    • Senior Citizen Savings Account can be opened by anyone who is over 60 years of age. It carries an interest of 7.4% per annum payable quarterly and qualifies for Section 80C tax benefit.

National Small Savings Fund (NSSF) in the Public Account of India was established in 1999.

The Fund is administered by the Government of India, Ministry of Finance (Department of Economic Affairs) under National Small Savings Fund (Custody and Investment) Rules, 2001, framed by the President under Article 283 (1) of the Constitution.

Objective:

To de-link small savings transactions from the Consolidated Fund of India and ensure their operation in a transparent and self-sustaining manner.

Government-backed small saving instruments encourage small-income investors to invest to earn high returns and to save on income tax as well.

PPF v/s EPF

EPF is a scheme to which both employer and employee contribute. This scheme is handled by the Employee Provident Fund Organization which is a government organization. Both employee and employer contribute a total of 24% of your basic salary to the EPF account.

  • The interest rate on investments in EPF is 8.1% while it is 7.1 % for a PPF account.
  • The money in the EPF account can be withdrawn when you resign from your job. But, the deposited amount in PPF cannot be withdrawn until maturity which is 15 years from the date of depositing the amount.
  • An individual can avail loan against PPF accounts whereas a person can withdraw money from EPF account to meet personal requirements.
  • Returns earned from a PPF account are exempted from tax payment while investments done in EPF qualifies for tax deduction under Section 80C of the Indian Income Tax Act, 1961.
  • The EPF account can be accessed by only salaried individuals while a PPF account can be opened by all.
  • PPF under Government Savings Banks Act, 1873 (earlier Public Provident Fund Act, 1968) while EPF under Employees Provident Fund And Miscellaneous Provisions Act, 1952.
economy Small Savings Schemes/Instruments