A pioneering research scientist, T.T.Munger quoted that, the practice of saving is an education in itself. As it encourages every kind of goodness, teaches abstinence, develops the feeling of order in life, trains to think ahead, and thus widens the psyche.
What is a saving scheme?
Program intended to energize reserve funds through little, however ordinary stores or programmed reasonings from pay rates or wages. Saving schemes help us to meet future financial goals, medical or personal emergencies.
Small saving schemes
Small-saving schemes are an essential part of household savings, and they are an important part of capital formation in the economy. As per the economic survey, an increase in private savings is one of the factors that will boost the economy. It’ll also lead to the growth and development of the economy.
Government Savings Promotion Act was proposed in February 2018 by the Union Cabinet. This was to make life easier for the small saving depositor. It made the investment transparent, easy, and accessible, through the small saving schemes.
Small saving instruments can be divided broadly into three. They are:
1) Postal deposits: deposits that we maintain with the post offices in the country. Specific saving schemes that are available with the post offices are savings account and recurring accounts. Some more are time deposits or fixed deposits, and monthly income scheme.
2) Saving certificates: National Small Savings Certificate (NSSC) and Kisan Vikas Patra
3) Social security schemes: examples of it are Pubic Provident Fund, Sukanya Samriddhi Yojna, etc.
The government fixes the interest rate of small saving schemes by adding benchmark yield. And additional interest spread ranges from zero to hundred basis points.
Will the withdrawal of tax benefits make small savings schemes less attractive? The retail investment space has seen a sharp turn in last few weeks on the back of the budget 2020. This is due to the impact of COVID-19. Investors now have a choice of whether or not to avail of the tax deduction benefits on small saving schemes. Most of the investors used to invest to avoid taxes. Since the era of independence, these small savings scheme has been undertaking usher of the tax incentives. Hence we have always seen these schemes coupled with the tax benefit. These schemes are not combined with the tax benefits for the first time. The savings schemes guarantee the benefits as usual and also provide an interest rate mostly irrespective of the market condition. Thus they remain a better option.
Advantages of small saving schemes:
- Small saving schemes have been the go-to option of the people to enhance their debt portfolios.
- There are a couple of instruments that the small saving schemes use. These lock the rate of interest at the time of beginning it. Subsequently, it does not influence the interest rate cuts in the future.
- Small saving schemes pay off lucrative returns with huge maturity, with the impact of compounding.
- These schemes are the best to start saving for an individual who recently begins a career.
- Savings is possible with the small saving schemes, by investing smaller amounts and having persistence.
- These schemes are ideal for people with low incomes.
Select small saving schemes based on the following:
▪ Estimated time to reach your financial goals:
For the financial goals of the near future, it is better to invest in short term saving instruments unlike for the long term goals.
▪ Interest rate:
It is essential to compare and contrast the interest rates of several small saving instruments before choosing an ideal one.
▪ Monitor risks involved like the tax benefit cut or interest cuts.
Five of the best small saving schemes offered by companies are:
1) NSC (National Savings Certificate) the Eighth-issue
The average benchmark yield of the scheme amounts to 6.57%, and the additional spread interest is 0.25%. According to the recent announcements of the state, the interest will be nearly 6.8%. This scheme also has seen a considerable hike in the interest rate for the December quarter. The interest rate of NSC is fixed based on the interest rate at the time of investment. And it is not influenced by the quarterly revisions of the interest rates. There is no higher limit on the amount to invest. The interest is taxable. It has an investment horizon (tenure) of five years. The minimum depositable amount is a hundred rupees only.
2) PPF (Public Provident Fund)
The average benchmark G-sec yield is 6.88%, additional interest-spread is 0.25%, and the government announced rate of interest is 7.1%. It is one of the best small-saving schemes as the interest earned is tax-free, and maturity tax does not exist. The minimum required period to hold the PPF account is five years. However, in the case of emergencies, it is possible to close the account prematurely. It’s allowed for the guardians. Making investments on behalf of the minors by nominating themselves. There exists an annual investment limit of 1.5 lakh per annum. This scheme has seen a hike of 8% on the interest for the October- December quarter in 2018. Its investment horizon is fifteen years. PPF has better tax benefits when compared to NSC.
3) Sukanya Samriddhi account scheme
The benchmark yield is 6.88% with an additional spread interest of 0.75%. The recently announced interest by the government is a 7.6% rate of interest. The interest earned is not taxable, and there is no tax on maturity. A guardian can open the account when the girl child is ten years. A guardian can open two accounts for two girl children. But the investment in both the accounts will have an upper limit of 1.5 lakhs per annum. Interest and maturity are tax-free. The scheme is suitable for the financial goals of a daughter’s marriage or education. The investment horizon is 21 years. The minimum deposit is 1000 rupees.
4) Post Office Monthly Interest Scheme
The average benchmark yield is, 6.38% with an additional spread-interest of 0.25%. According to the new developments, the interest rate is 6.6%. A single investor can open several accounts in the same name. There is an upper limit of 4.5 lakh rupees in an account and nine lakh rupees in a joint account. The interest gained is not tax-free, but the scheme guarantees monthly income, which might seem efficient for a retirement plan. The minimum deposit required is 1,500 rupees.
5) Senior Citizens Saving Scheme
The average G-sec yield is 6.41%, along with 1% of spread-interest. According to the recent announcements of the government, the interest will amount to 7.4%. It is the best scheme for senior citizens. The minimum depositable amount is 1000 rupees. The tenure is of five years.
For up to three-year term deposits, the government-announced interest rates are 5.5% if looking for a short-term savings scheme.