A number of products from the stable of small savings schemes, whose rates are reviewed every quarter and some times reset by the government, help you save tax, and the start of a financial year is a good time for tax planning. On 29 March, the government announced that small savings rates will remain unchanged for the first quarter of FY2019-20, from the previous quarter. How do these schemes stack up?
You will probably find Public Provident Fund (PPF) in the portfolios of your parents and even your grandparents and it’s advisable to have it in your portfolio too. PPF has a relatively high interest rate of 8%. It has a tenure of 15 years and can be renewed indefinitely in blocks of five years. Partial withdrawals can be made in the seventh year and you can also avail loans against it. PPF balance is immune from attachment by any court decree.
The interest on PPF is calculated on the lowest balance between the 5th and last date of each month, so you should ideally invest in it before the 5th of each month. If you have the requisite lump sum, invest before 5 April to get interest on the entire amount for the entire year.
This is only available to senior citizens (those above the age of 60; the limit is 55 years in case of superannuation or VRS). At 8.7%, SCSS carries the highest interest rate among small savings schemes. It has a tenure of five years which can be extended by another three years. With quarterly interest payment, SCSS can be a steady source of income for retirees.
Sukanya Samriddhi Yojana (SSY) is open to the parents of girl children. It can be opened for a girl less than 10 years old. It has a tenure of 21 years or until the girl is married after the age of 18, but deposits need to be made only for the first 15 years.
Partial withdrawals up to 50% of the balance are also allowed after the girl attains the age of 18. At 8.5% this scheme earns a solid interest rate and the interest is tax-free.
Five-year Post Office FD
The five-year post office fixed deposit (FD) decidedly falls short when it comes to utilising your tax-saving money efficiently. The current rate of interest at 7.8% for this quarter is at the bottom of the tax-saving small saving schemes pile and the interest is fully taxable.
FDs are typically favoured for their safety, but this factor doesn’t matter against other small savings schemes since the government administers them all.
The National Savings Certificate (NSC) is an oddly structured savings instrument. It matures after five years and the interest gets reinvested in the instrument. However, this reinvested interest is not tax-free though it is deductible under Section 80C for the first four years. The interest earned in the fifth year is fully taxable. The interest, even in the years in which it is tax deductible, uses up a part of your Section 80C limit. Also, the tax deduction has to be claimed in your income tax return or you do not get its benefit. The interest rate at 8% is on par with that of PPF and the tenure of five years is shorter than PPF.
Experts have come out against NSC due to its tax inefficiency. “I do not recommend NSCs, especially to people in higher tax brackets. This is because the interest is fully taxable," said Mrin Agarwal, founder director of Finsafe India Pvt. Ltd and co-founder of Womantra.
Small savings schemes are good tax-saving options for risk-averse investors. Within the small savings basket, PPF ranks foremost for investors’ debt allocation. SCSS is good for senior citizens in the lower tax bracket and SSY for parents of a girl child, but both are restricted to these groups. If you can bear more risk, go for equity-linked savings schemes.