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Saving Schemes are launched by the Government of India or public sector financial institutions or Banks. They vary in their interest rates, investment horizons and tax treatments. A saving scheme financially prepares us for unforeseen personal and medical emergencies. It helps you meet your personal aspirations and that of your family’s like – additional educational course to supplement your existing qualifications, child’s higher education and marriage, etc.
These small savings plans not only provide growth to your money but also provide you with financial security at various stages of your life. It depends on your needs what product suits you best. You must go through the scheme documents before starting any investment scheme. Each financial plan has its own advantages and shortfalls, only a good research will save your hard earn money.
Launched by the Ministry of Finance under the umbrella of the “Beti Bachao, Beti Padhao” campaign in 2015, The Sukanya Samriddhi Yojana (SSY) has become quite popular. The scheme itself is simple. You can open an account in your daughter’s name, provided she’s less than 10 years of age, by visiting the post office or a bank that offers the scheme (SBI, Allahabad Bank, ICICI Bank and HDFC Bank, to name a few). You can invest between Rs 250 and Rs 150,000 per year in the SSY account every year, and this amount is tax deductible under Section 80C. An online investment process was provided last year. Alternatively, you may withdraw half the balance, if you so desire, for her higher education purposes when your daughter turns 18. The returns from this scheme are generally significantly higher than the yield on government bonds. Presently, it stands at 8.5%.
PPF rates underwent a meaty hike from 7.6 % to 8 % in October 2018. Contributions to the PPF qualify for a tax deduction under Section 80C, and maturity proceeds are tax-free as well. Thus, the PPF falls under the “EEE” or “Exempt, Exempt, Exempt” category.
The PPF’s tax efficiency notwithstanding, it isn’t a “fixed return” product per se. Interest is computed on a monthly basis on the prevailing interest rate for that month, and compounded annually. So, don’t rush into the PPF in a bid to “lock in” the current rate of 8%. It’s impossible to predict how G-Sec yields will move over the 15-year tenure of the PPF, and a sharp drop in bond yields can dent your PPF returns for that period.
Interest rate on NSC has been hiked from 7.6% to 8% for the December quarter. The revised rate is at par with some of the highest paying five year bank FDs. But NSC has an edge over tax saving bank FDs and PPF as there is no upper limit on the investment amount and it can be pledged as security to get a loan.
Also, interest rate on NSC in spite of quarterly revisions gets locked for the five year term at the time of investment, unlike in the case of PPF. The interest income from NSC is added to the investor’s income and taxed as per the applicable tax slab. However, the interest is re-invested every year and the cumulative interest, compounded annually, for the 5-year period is paid out along with the principal at the time of maturity. Hence, interest income for the first four years qualifies for tax deduction within the Rs 1.5 lakh limit under Section 80C.
A 3-5 year bank fixed deposit right now fetches 7.5-8%. Most banks offer senior citizens almost 25-50 basis points higher interest. This year’s budget gave an additional Rs 50,000 exemption to interest income earned by senior citizens.
But the interest rate of the Senior Citizens’ Savings Scheme has been hiked to 8.7% per annum, making it a far better option than bank deposits. What’s more, it gives out quarterly interest, which is a big draw for retirees seeking regular income.
Senior citizens who have not yet hit the Rs 15 lakh investment limit for the scheme should invest immediately and lock in at the high rate. Accounts can be opened in any post office or designated branches of PSU banks.
Somewhat similar in structure to NSC, Kisan Vikas Patra or KVP is a compounded-return product that “doubles” your money within a pre-set timeframe. Presently, KVP matures in nine years and four months, translating into an effective compound interest rate of 7.7 % per annum. Unlike NSC, contributions to KVP do not qualify for tax benefits, and the interest earned is added to your income in the year of maturity and taxed. The KVP allows for premature withdrawals after two and a half years, at six-month intervals thereafter. There is no ceiling limit to KVP investments.
The Post Office Monthly Income Scheme will earn interest of 7.7% for the December quarter. An investor can open multiple accounts in his name, subject to the upper limit of Rs 4.5 lakh in a single account and Rs 9 lakh in a joint account. The scheme offers liquidity to the investor allowing premature withdrawals after one year, but with a penalty.
Premature withdrawals after one year attract 2% deduction on the deposit and a nominal 1% after three years. But, investor should note that the scheme is highly tax inefficient because the interest earned is fully taxable and does not fetch any rebate under Section 80C. Though it guarantees monthly income, it is not advised as a good savings avenue even for retirees.
The Employee Provident Fund (EPF) is one of the best ways to save money for salaried individuals. The scheme encourages savings for individuals, for their retirement. But, in case of an emergency, you can even withdraw that money. You can either withdraw the money physically or online. You can use the online withdrawal claim facility only if your Aadhaar is linked with your UAN. Earlier, it was mandatory for employees to have the attestation of their employers to facilitate withdrawal.
The interest rate applicable on the amount accumulated in the EPF account is decided by the government and has traditionally ranged between 8-12% of the funds maintained in the account. The current rate is 8.65%
Small savings schemes can be variable rate or fixed rate products. The popular PPF and the girl-child oriented SSY are variable rate products in which rates applicable on the investment keep changing throughout the tenure. So, new rates announced for each quarter will apply to the accumulated corpus until then. Therefore it will not really help to rush into investments in these schemes just to take advantage of higher rates now.
But in fixed rate products, the rate at the start of the investment stays until maturity. New rates announced each quarter will apply only to investments made in the quarter and will hold till their maturity. This category comprises the NSC, SCSS, Kisan Vikas Patra (KVP), Post office monthly income scheme (POMIS) and Post office time and recurring deposits.
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