Small Savings Schemes
- December 30, 2022
- Posted by: OptimizeIAS Team
- Category: DPN Topics
Small Savings Schemes
Context: With inflation averaging at more than 6% through 2022 and interest rates rising, there is an economic rationale for returns on small savings instruments such as the Public Provident Fund (PPF) to be raised for the first quarter of 2023, but the government may opt to maintain status quo to keep its own borrowing costs in check.
About Small Savings Schemes:
- 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 provide returns higher than bank fixed deposits, sovereign guarantee and tax benefits.
- Since 2016, the Finance Ministry has been reviewing the interest rates on small savings schemes on a quarterly basis.
- All deposits received under various schemes are pooled in the National Small Savings Fund.
- As per Reserve Bank of India calculations, the rates on these schemes, based on a formula linked to the yields on government securities (G-secs), are 44 to 77 basis points (bps) below their formula-implied rates. One bp equals 0.01%. As per the formula, the PPF return should have been set at 7.72% instead of the present 7.1% and rates on nine of the dozen schemes were 55 bps to 77bps lower than the formula-linked rate.
- The money in the fund is used by the Centre to finance its fiscal deficit.
Types of Schemes:
The schemes can be grouped under three heads –
- Post office deposits
- Savings certificates and
- Social security schemes
1. Post Office Deposits
- Under this we have the savings deposit, recurring deposit and time deposits with 1, 2, 3 and 5 year maturities and the monthly income account.
- Can be opened individually or jointly with an initial investment of Rs 500.
- The recurring deposit compounded quarterly matures after 60 months from the date of opening.
- It allows investors to save on a monthly basis with a minimum deposit of Rs 100 per month.
- Investments under the 5-year time deposit up to Rs 1.5 lakh further qualifies for benefit under section 80C of Income Tax Act.
2. Savings Certificates
- Under this, we have the National Savings Certificate and the Kisan Vikas Patra.
- The interest that is earned is reinvested into the scheme every year automatically.
- The NSC also qualifies for tax saving under Section 80C of the income tax act.
- The Kisan Vikas Patra, which is open to everyone, doubles your one-time investment at the end of 124 months.The minimum investment amount is Rs 1000 while there is no upper limit.
3. Social security schemes
- In the third head of social security schemes, there is Public Provident Fund, Sukanya Samriddhi Account and Senior Citizens Savings Scheme.
Public Provident Fund
- The Public Provident Fund is a popular saving option for long term goals like retirement.
- It qualifies for tax benefit under Section 80C of the Income Tax Act.
- Upon maturity of the account after 15 years, it can be extended indefinitely in blocks of 5 years.
- The accumulated amount and interest earned are exempt from tax at the time of withdrawal.
Sukanya Samriddhi Account
- 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 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
- And finally, the 5-year Senior Citizen Savings Account can be opened by anyone who is over 60 years to age.
- It qualifies for Section 80C tax benefit.
- These time-tested and safe modes of investments don’t offer quick returns, but are safer when compared to market-linked schemes.