5 popular small savings schemes

In times when investors' attention is hogged by market-linked avenues like mutual funds and ULIPs, small savings schemes have become a forgotten breed.
Alongside fixed deposits, small savings schemes (also referred to as post office schemes) would classify as the most conventional investment avenues.
Assured returns and a sovereign guarantee (read the highest degree of safety) are the hallmarks of small savings schemes. And these traits appeal to risk-averse investors in no small measure.
Even for risk-taking investors, holding a portion of their investment portfolios in assured return schemes is vital from an asset allocation perspective.
Small savings schemes, in turn, would classify as the most comprehensive pool of assured return schemes.
In this note, we study the investment proposition offered by five popular small savings schemes.
Public Provident Fund
Investments in Public Provident Fund are recurring in nature and run over a 15-yr period. Annual contributions are mandatory to keep the PPF account active. The minimum and maximum investment amounts are pegged at Rs 500 pa and Rs 70,000 pa respectively.
Only contributions of upto Rs 70,000 pa are eligible for tax benefits under Section 80C. Any amount invested over the aforementioned is returned without interest.
At present, PPF investments yield a return of 8.0% pa. However, it should be noted that the returns are assured but not fixed. This is because the rate of return is subject to revision i.e. it can be revised upwards or downwards thereby impacting the returns.
Liquidity
With no provision for a regular interest payout, PPF fares rather poorly on the liquidity front. Withdrawals can be made only from the seventh financial year. Furthermore, the amount that can be withdrawn depends on the balance in the PPF account in the earlier years.
Taxation
Apart from Section 80C tax benefits on the amount invested, interest income from PPF investments is exempt from tax under Section 10(11) of the Income Tax Act.
Apt for...
Given that investments in PPF run over a 15-yr period and that annual contributions are mandatory, it is an ideal avenue to build a corpus for long-term needs like retirement and children's education. It will appeal to investors who accord higher priority to returns over liquidity.
National Savings Certificate
Investing in National Savings Certificate (NSC) entails making a lump sum investment for a 6-Yr period. While the minimum investment amount is Rs 100, there is no upper limit. Presently, investments in NSC earn a return of 8.0 per cent pa, compounded on a half-yearly basis.
In other words, Rs 100 invested will grow to approximately Rs 160 on maturity. Unlike PPF, the rate of return in NSC is locked in while investing; as a result, the investments are indifferent to any subsequent change in rates.
Liquidity
NSC scores poorly on the liquidity front. Interest income is received on maturity. Also, premature withdrawals are permitted only in specific circumstances like death of the holder, forfeiture by the pledgee or under court?s order.
Taxation
Investments of upto Rs 100,000 pa are eligible for tax benefits under Section 80C. Furthermore, the interest accruing annually is deemed to be reinvested, hence it qualifies for deduction under Section 80C. However, the interest income is chargeable to tax.
Apt for...
Given its nature (lump sum investments), NSC is best suited for gainfully investing one-time surpluses and to provide for needs that will arise over a corresponding (6-yr) timeframe. It will be apt for investors seeking returns over liquidity.
Post Office Monthly Income Scheme
As the name suggests, Post Office Monthly Income Scheme (POMIS) generates a monthly income for investors. The minimum investment amount is Rs 1,500; conversely, the maximum amounts have been pegged at Rs 450,000 and Rs 900,000 in case of single and joint accounts respectively.
Investments in POMIS earn a return of 8.0 per cent pa and the investment timeframe is 6 years. On maturity, investors are eligible to receive a 5.0% bonus on the original sum invested.
Liquidity
With a monthly interest payout, POMIS fares better than all its peers on the liquidity front. Premature withdrawals are permitted after completion of 1 year from the date of making the investment.
If the premature withdrawal is made after 1 year but before 3 years, then 2.0 per cent of the initial amount invested is deducted as a penalty. Similarly, a premature withdrawal on or after 3 years, attracts a penalty of 1.0 per cent of the initial amount invested.
Taxation
Investments in POMIS are not eligible for any tax benefits. Also, the interest income is chargeable to tax.
Apt for...
POMIS is suited for investors like retirees and senior citizens who seek assured and regular income.
Post Office Time Deposits
Post Office Time Deposits are fixed deposits from the small savings segment. While investors can opt for 1-yr, 2-yr, 3-yr and 5-yr POTDs, only the 5-yr ones are eligible for tax benefits under Section 80C.
A 5-yr POTD earns a return of 7.5 per cent pa; the interest is calculated quarterly and paid annually. In other words, Rs 10,000 invested in a 5-Yr POTD will deliver an interest income of approximately Rs 771 pa. The minimum investment amount is Rs 200, while there is no upper limit.
Liquidity
POTDs fare favourably on the liquidity front, thanks to the annual interest payouts. Premature withdrawals are permitted after 6 months from the date of deposit; however, the same entails bearing a penalty in the form of loss of interest. Finally, any excess interest paid is recovered from the principal amount and the interest payable.
Taxation
Investments of upto Rs 100,000 pa are eligible for tax benefits under Section 80C. The interest income is chargeable to tax.
Apt for...
The 5-yr POTD can be utilised for generating an annual and risk-free income, alongside making a tax-saving investment
Senior Citizens Savings Scheme
Unlike the other avenues that we have discussed so far, Senior Citizens Savings Scheme (SCSS) is open only to a section of the investor community i.e. senior citizens.
Individuals who are 60 years of age and above can invest in the scheme; those who have attained 55 years of age and have retired under a voluntary retirement scheme can also participate in the scheme, subject to certain conditions being fulfilled.
The minimum and maximum investment amounts are Rs 1,000 and Rs 1,500,000 respectively. Investments in SCSS run over a 5-yr period and earn a return of 9.0% pa.
Liquidity
Given that SCSS is targeted at senior citizens, the liquidity aspect has been adequately addressed; interest payouts are made on a quarterly basis i.e. on March 31, June 30, September 30 and December 31, every year.
Premature withdrawals are permitted after the expiry of 1 year from the date of opening of the account. In case of withdrawals made after 1 year but before the completion of 2 years, an amount equal to 1.5 per cent of the initial amount invested is deducted. In case of withdrawals made on or after the expiry of 2 years, an amount equal to 1.0% of the initial amount is deducted.
Taxation
Investments in SCSS are eligible for tax benefits under Section 80C. The interest income is chargeable to tax and subject to tax deduction at source as well. Investors whose tax liability on the estimated income for the financial year is nil, can avoid TDS by furnishing a declaration in Form 15-H or Form 15-G as applicable.
Apt for...
Expectedly, SCSS is meant for senior citizens who wish to receive an assured income at regular time intervals. The tax benefits only add to the allure of the scheme.