Small savings schemes are best suited for small-scale investors. Not only can they learn financial discipline but earn a tad bit higher returns while protecting their capital
Saving our hard-earned money in bank Fixed Deposits (FDs) is natural and the most common step for any risk averse investor. Although FDs are safe, post-demonetisation, with sudden infusion of funds, banks in particular, reduced their interest rates and some even offered interest rates between 6.5 and 7.5 per cent for tenures ranging from one to 10 years. An alternative investment option available for small investors are post-office schemes that are safe and risk-free. While Post office savings, Public Provident Fund accounts and time deposits are popular, other schemes are equally beneficial, like the Kisan Vikas Patra (KVP), which is a small saving post office certificate scheme introduced in 1988, primarily for the farmers, but is now available for all. KVP doubles the amount invested in 118 months, with a minimum investment of Rs 1,000 and does not have any upper limit. To prevent possibilities of money laundering, the Government made PAN Card proof compulsory for investments above Rs 50,000 in 2014. To deposit Rs 10 lakh and above, one has to now submit income proofs (salary slips, bank statement, ITR document et al). It is a low-risk savings platform where you can safely park your money for a certain period of time.
KVP is a good choice for risk averse individuals who have surplus money, which they may not require in the near future. Guaranteed returns and capital protection are the hallmarks of KVPs. As this scheme was originally intended for the farming community, priority was given to encourage them to save for rainy days. Effective interest rate for KVP varies, depending on the number of years invested in the scheme at the time of purchase. The current interest rate is 7.7 per cent for the quarter October 1, 2018, to December 31, 2018, prior to which the rate was 7.3 per cent, compounded yearly. By compounding the interest, one can receive more returns on his/her deposit. However, the main drawback of KVP is that it does not come under Section 80C Deductions of the Income Tax Act and returns are completely taxable. KVP can be a good option of investment for very small investors who do not fall under regular tax bracket and can find the discipline of small but long-term saving.
Another small savings post-office scheme, the National Savings Certificate (NSC), available to small investors, comes with a tax advantage as investments of up to Rs 1.5 lakh in the scheme can earn a tax break under Section 80C of the Income Tax Act. The certificates earn a fixed interest, which currently stands at the rate of 7.6 per cent per annum. This scheme, too, is secure 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. Anyone who is looking for a safe investment avenue to save taxes, while earning a steady income, can opt for this scheme. NSC offers guaranteed interest and complete capital protection. Currently, the rate of interest is eight per cent for the quarter October 1, 2018 to December 31, 2018 (annually) prior to which the rate of interest stood at 7.6 per cent — the Government revises this rate every quarter and an investor can start as small as Rs 100 (or multiples of 100) as an initial investment, and increase the amount when feasible.
To add to the list, a popular girl child savings scheme, Sukanya Samriddhi Account was launched in 2015, to encourage savings for the girl child’s education. The minimum amount required for opening a Sukanya Samriddhi account and the annual deposit requirement has been brought down to Rs 250, from Rs 1,000 earlier from July 2018. Like other small savings instruments, the interest rate is revised every quarter and currently, Sukanya Samriddhi account fetches an interest of 8.1 per cent per annum, compounded yearly. Apart from higher interest rate as compared to other small savings instruments such as PPF, tax exemption is also one of the greatest advantages of this scheme as contribution into this account upto Rs 1.5 lakh in a financial year qualifies for income tax deductions under Section 80C and 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 and 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 a maximum of 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 small 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)
