The Indian government has instituted a number of small saving schemes to encourage investors to save regularly. The main attraction of these schemes is the implicit guarantee of the government, which is the borrower. These schemes are offered through the post office and select banks.
The saving schemes currently offered by the government/Post Office are:
- Public Provident Fund (PPF)
- Senior Citizens’ Saving Scheme (SCSS)
- National Savings Certificate (NSC)
- Post Office Monthly Income Scheme (POMIS)
- Post Office Time Deposits (POTD)
- Post Office Recurring Deposit
- Kisan Vikas Patra (KVP)
- Sukanya Samriddhi Account
As per the decision of the Government on the recommendations of the Committee for Comprehensive Review of National Small Savings Fund (NSSF), the rate of interest on small savings will be dynamic and reflect the interest rates prevailing in the market. Hence, rates of interest on small saving schemes will be notified on a quarterly basis. The rate of interest on the Sukanya Samridhi Yojana, the Senior Citizens Savings Scheme and the Monthly Income Scheme will be aligned with G-sec rates of similar maturity with a spread ranging from 25 basis points (bps) to 100 bps. The PPF, 5 year NSC and 5 year term deposit will enjoy spread over G-secs of comparable maturity. The 1, 2 and 3 year term deposits, KVP and 5 year Recurring deposits will have their interest rates aligned to similar instruments in the banking sector. Also, the rate of interest on an investment made in all schemes, except PPF, on a particular date remains unchanged for the entire duration of the investment till maturity, irrespective of the revision in subsequent years. In other words, the balances lying to the credit of the PPF account or the fresh contributions made to this account will bear interest as per the rates notified by the Government from time to time.
Public Provident Fund (PPF)
Instituted in 1968, the objective of the PPF is to provide a long term retirement planning option to those individuals who may not be covered by the provident funds of their employers or may be self-employed.
PPF is a 15-year deposit account that can be opened with a designated bank or a post office. It can also be opened online with a few banks. A person can hold only one PPF account in their name except an account in the name of a minor child to whom he or she is a guardian. An individual can open a PPF account at any age. HUFs and NRIs are not allowed to open PPF accounts. If a resident subsequently becomes an NRI during the prescribed term, he/she may continue to subscribe to the fund till its maturity on a non-repatriation basis. Joint account cannot be opened, however nomination facility is available.
Minimum amount that needs to be deposited in this account is Rs.500 per year. The maximum limit is Rs.1,50,000. Amount can be deposited in any number of installments in a FY in multiple of Rs. 50 and maximum up to Rs. 1.50 lakh. Regular deposits have to be made in the account over the term of the fund. If in any financial year, minimum deposit of Rs.500/- is not made, the said PPF account shall become discontinued.
Interest is calculated on the lowest balance available in the account between 5th of the month and the last day of the month, however, the total interest in the year is added back to PPF only at year end. Interest is cumulated and not paid out.
The account matures after expiry of 15 years from the end of financial year in which the account was opened. It can be extended in blocks of 5 years.
A PPF account can be closed prematurely after the completion of 5 years for specific purposes such as medical treatment for the account holder and dependents and higher education of children. One withdrawal in a financial year is permissible from seventh financial year. Maximum withdrawal can be 50% of the balance amount at the end of the fourth year or the immediate preceding year, whichever is lower.
Premature closure of the PPF is allowed in cases such as serious ailment, education of children and such. This shall be permitted with a penalty of a 1% reduction in the interest payable on the whole deposit and only for deposits that have completed 5 years from the date of opening.
On completion of term, the account can be closed or continued, with or without additional subscription, for further blocks of 5 years. Once an account is continued without contribution for more than a year, the option cannot be changed.
Account holders can avail of a loan facility in the 4th to 6th year out of the amount standing to the credit in the account between the third financial year to the fifth financial year.
In the event of the death of the account holder during the term of the scheme, the balance in the account shall be paid to the nominee or to the legal heir if the account does not have a nomination.
Contribution to PPF is eligible for deduction under sec 80C of Income tax Act 1961. Interest is completely tax free. Unlike other instruments which are eligible for tax deduction under Section 80C, PPF enjoys an exempt-exempt-exempt (EEE) status, where withdrawal on maturity is also not taxed.
A PPF account is not subject to attachment (seizure of the account by Court order) under any order or decree of a court.
National Savings Certificate (NSC)
National Savings Certificates are issued by the government and available for purchase at the post office. NSCs are issued with a tenor of 5 years (NSC VIII issue amended as of December 1, 2011). Interest is compounded annually and accumulated and paid on maturity.
The certificates can be bought by individuals on their own account or on behalf of minors. NRI, HUF, Companies, trusts, societies, or other institutions are not allowed to purchase the NSCs. If a resident holder becomes an NRI subsequent to the purchase, the certificate can be held till maturity. However, the maturity value cannot be repatriated. Joint holding is allowed and the certificate can be held jointly by up to two joint holders on joint basis or either or survivor basis.
Investment limit is minimum of Rs. 1000 and in multiple of Rs. 100 , no maximum limit. Any number of accounts can be opened under the scheme.
Investments made in the NSC VIII issue enjoy tax benefits under section 80C of Income Tax Act, 1961. Accrued interest is taxable, but is it deemed to be reinvested and therefore the interest becomes eligible for Section 80C benefits. There is no tax deducted at source at the time of redeeming the certificate value.
NSCs can be transferred from one person to another with the consent of a designated official of the post office under situations such as transfers to heirs of a deceased holder, under a court order, to near relative such as wife, lineal ascendant or descendant and transfer to a bank, housing company or other specified institution as security.
Premature encashment is allowed only in case of death of the holder, forfeiture by a
pledgee, or under orders of court of law. If the encashment happens within a period of one year from the date of the certificate, only the face value will be paid. If the encashment happens after one year but before three years, simple interest is paid at the rates applicable to Post office savings accounts. After three years, the certificates will be encashed at a discounted value specified in the rules.
Nomination is allowed in the certificates, which can be done at the time of the purchase or subsequently. There shall be no nomination allowed on certificate held on behalf of a minor. A nomination can be cancelled or changed by making an application to this effect at the post office where the certificates stands registered.
The certificates are also accepted as collateral for taking a loan. The government has
enabled holding NSCs in demat form.
Senior Citizens’ Saving Scheme (SCSS)
The Senior Citizens’ Saving Scheme is a savings product available to only senior citizens of age 60 years or above on the date of opening the account. Proof of age and a photograph of account holder are required. The age limit is reduced to 55 years in case of an individual retiring on superannuation or otherwise, or under VRS or special VRS, provided the account is opened within one month of date of receipt of retirement benefits. The retired personnel of Defence Services, excluding Civilian Defence Employees, shall be eligible irrespective of age limit. The account can be opened at any post office undertaking savings bank work and a branch of a bank authorized to do so. The scheme can be held in individual capacity or jointly with the spouse. The age restrictions apply only to the first holder. NRIs, PIOs and HUF are not eligible to invest in this scheme.
The term for the scheme is 5 years. A one-time extension of three years is allowed, if applied within one year of its maturity. Maximum limit of investment is Rs.15 lakhs. However, in case of retirees before the age of 60 years the limit is restricted to retirement benefits or Rs.15 Lakhs, whichever is less. An investor can open more than one account subject to the condition, that amount in all accounts taken together does not at any point of time exceed Rs.15 Lakhs. The deposit can be made in cash if the amount is less than Rs. 1 lakh, or cheques or demand draft.
The interest rate applicable on the scheme is announced on a quarterly basis. The benefit of section 80C is available on investment but interest is fully taxable.
Premature closure is allowed after expiry of one year subject to following conditions:
- After expiry of 1 year but before 2 years, 1.50 % of deposit shall be deducted.
- After expiry of 2 years, 1% of the deposit shall be deducted.
- No deduction is made in case of closure of account due to the death of the account holder.
Nomination facility is available even in case of joint account. In case of a jointly held account, the right of the joint holder to receive the amount will rank above that of the nominee. The nomination can be cancelled or changed at any time. The investment is nontransferable and non-tradable.
Post Office Monthly Income Scheme (POMIS)
The Post Office Monthly Income Scheme provides a regular monthly income to the depositors. This scheme has a term of 5 years.
Minimum amount of investment in the scheme is Rs.1000, and the maximum amount is Rs.4.5 lakhs for a singly held account and Rs.9 lakhs if the account is held jointly. A depositor can have multiple accounts, but the aggregate amount held in the scheme across all post offices cannot exceed the maximum permissible limits. The deposit can be made in cash, cheque or demand draft.
The applicable interest rate is announced every quarter and is payable on a monthly basis with no bonus on maturity. Nomination facility is available and can be made at the time of opening the account or subsequently at any time before maturity.
Premature withdrawal of the invested amount is allowed after 1 year of opening the account. If the account is closed between 1 and 3 years of opening, 2% of the deposited amount is deducted as penalty. If it is closed after 3 years of opening, 1% of the deposited amount is charged as penalty.
Post Office Time Deposits (POTD)
Post Office Time Deposits are similar to fixed deposits of commercial banks. The post office accepts deposits with terms of one year, two years, three years and five years. The account can be held singly in individual capacity or jointly by a maximum of two holders.
The minimum deposit amount is Rs.1000. There is no maximum limit. The interest rates on these deposits are subject to changes every quarter as announced by the government.
Interest rates are compounded quarterly and are subject to tax. The five year term deposit is eligible for tax benefits under Section 80C of the Income Tax Act, 1961.
Post Office Recurring Deposit (RD)
Post Office Recurring Deposit (RD) accounts can be opened by resident individuals, and a maximum of two people can hold an account jointly or on either or survivor basis. An individual can hold any number of RD accounts, singly or jointly. Deposits can be made at a minimum amount of Rs.100 per month and in multiples of Rs.10 thereafter for every calendar month. There is no maximum investment limit. Interest is payable on a quarterly compounded basis. The maturity amount with interest is paid at the end of the term. Interest is taxable. Deposits have to be made regularly on a monthly basis, and penalties apply for non-payment of instalment.
An account can be discontinued by the Post Office, if payments are not made for four months and if such a condition is not rectified by paying the penalties. Deposits can also be made in advance and a nominal rebate is allowed in such cases. The account can be closed after three years, and in cases of such pre-mature closure only the savings bank interest rate is payable. One withdrawal is allowed after the deposit has been in operation for at least one year and 12 monthly deposits have been made. Interest as applicable will apply on the withdrawal and the repayment can be in a lump sum or in instalments. An account can be extended for another 5-year term after maturity.
Kisan Vikas Patra (KVP)
The KVP can be purchased by an adult for self or by two adults for a minor investor. NRIs HUFs and other entities are not eligible to invest in the KVP. It can be purchased from any departmental post office or bank through cash, local cheque or demand draft. The minimum investment is Rs.1000 and in multiple of Rs. 100 and there is no maximum investment limit. The instrument matures in 124 months (10 years & 4 months). The effective interest rate is announced on a quarterly basis. The facility of nomination and joint holding is available in the KVP and the certificate can be transferred from one person to another and one post office to another by endorsement and delivery. KVP can be prematurely encashed 2 ½ years from the date of issue. There is no tax incentive for the investment made and the interest earned is taxed on accrual basis.
Sukanya Samriddhi Account Scheme (SSA)
The Sukanya Samriddhi Account is a scheme launched for the benefit of girl children. The account has to be opened in the name of the girl child by a natural or legal guardian. The account is opened with Post Office as well as an authorized list of banks such as SBI, Axis bank, ICICI bank, Canara bank, and others. Only one account can be opened in the name of a child and a guardian can open a maximum of two accounts in the name of two different girl children. The age of the child cannot be more than 10 years at the time of opening the account. The minimum investment in the account is Rs.250 in a financial year and a maximum of Rs.1,50,000. Investments can be made in a lumpsum or in tranches. There is no limit on the number of deposits that can be made in a financial year in multiples of Rs.50. The account can be transferred to any place in India. The account will mature on the completion of 21 years from the date of opening the account. If the girl child gets married before the completion of 21 years then the account is closed. Partial withdrawal is allowed after the holder attains 18 years of age or passed 10th standard, to the extent of 50% of the amount in balance at the end of the preceding financial year. Any amount deposited in the account is eligible for deduction under section 80C of the Income Tax Act.
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