Small savings schemes are an excellent way for investors to learn financial discipline and earn a tad bit higher returns while protecting their capital
The country’s investment scenario offers a multitude of avenues to meet the diverse requirements of investors. Among other things being equal, these options can differ from each other on their returns, maturity period and the risk-taking capacity of investors. However, there is a direct relationship between risk and return — the higher the risk involved, the higher the returns to be expected. Investors who aspire for bigger returns have to bear a high level of risk as well which is evident from investments made in the highly volatile stock market. As far as the time aspect of the investment is concerned, there are financial instruments which are short-term in nature and these include savings bank accounts, money market or liquid funds and fixed deposits with banks. On the other hand, there are some financial instruments which offer a long-term horizon for investment. These include post office savings, Public Provident Fund (PPF), company fixed deposits, bonds and mutual funds.
Small savings schemes is a category of investments in India which was developed after Independence to provide safe and simple investment opportunities to the lower and middle income groups. These schemes were channelised and administered by Government institutions such as post offices and nationalised banks. There are various schemes offered by the Government through post offices across the country. These schemes include the post-office savings account, the post-office Recurring Deposit Account, the post-office Time Deposit Account, the post-office Monthly Income Account, the post-office Public Provident Fund Account, the Kisan Vikas Patra, the National Savings Certificate, and the Senior Citizens Savings Scheme. The maturity period of these schemes varies from very short, as in the case of a savings deposit, to over 15 years as in the case of PPF. However, all these investment options come under the same risk class as all of them have fixed returns and are guaranteed by the Government. The returns vary between schemes based up their features and maturity period. These schemes are operated through about 160,000 post offices across the country. The PPF scheme is also operated through more than 8,000 branches of public sector banks. Let’s look at some of the small saving schemes.
Kisan Vikas Patra, a small saving post office certificate scheme introduced in 1988 primarily for farmers (hence the name), now available to all, doubles the amount invested in 113 months, with a minimum investment of Rs 1,000 and does not have any upper limit. To prevent the possibilities of money laundering, the 2014 Government-made PAN card is compulsory for investments above Rs 50,000. For deposits Rs 10 lakh and above, you must submit income proofs (salary slips, bank statement, ITR document etc). It is a low-risk savings platform, where you can safely park your money for a certain period. The current interest rate is 7.6 per cent compounded annually. However, the main drawback of Kisan Vikas Patra is that it does not come under 80C deductions and the returns are completely taxable. It can be a good option of investment for very small investors who do not fall under the regular tax bracket and can find the discipline of small but long-term saving. Another small savings post office scheme, National Savings Certificate, available to small investors, comes with a tax advantage as investments of up to Rs 1.5 lakh can earn a tax break under Section 80C of the Income Tax Act. The certificates earn a fixed interest, which is currently at the rate of 7.9 per cent compounded annually but payable at maturity. This scheme, too, is a secure and low-risk product and can be bought from the nearest post office in the name of self, minor or with another adult as a joint account. They come with two fixed maturity periods — five years and 10 years — and there is no maximum limit on the purchase of NSCs.
A popular girl child savings scheme, Sukanya Samriddhi, was launched in 2015 to encourage savings for a girl child’s education and the minimum amount required for opening an account and the annual deposit requirement have been brought down to Rs 250 from Rs 1,000 earlier from July 2018. This account fetches an interest of 8.4 per cent per annum, compounded yearly. The entire interest earned and maturity amount is also non-taxable. However, it has an investment cap and the maximum amount that can be deposited in a Sukanya Samriddhi account is Rs 1.5 lakh in a financial year. Deposits can be made for the first 15 years and after this period the account will only earn interest as per the applicable rates. This matures on completion of 21 years from the date of opening of account. A Sukanya Samriddhi account can be opened up to age of 10 years only from the date of birth of the girl child. A guardian can open only one Sukanya Samriddhi account in the name of one girl child and maximum two accounts in the name of two different girl children in post offices and designated banks. These small savings schemes are an excellent way for investors to learn financial discipline and earn a tad bit higher returns while protecting their capital. It is highly beneficial to invest in any one of the schemes depending whether the investor falls in tax bracket or not.
(The writer is Assistant Professor, Amity University)
