Personal Finance

Do small savings schemes still make the cut after Budget 2020?

Anand Kalyanaraman | Updated on February 23, 2020 Published on February 22, 2020

Yes, most of them remain attractive even in the optional new tax regime

From FY21, we have the option of continuing with the current tax regime (with existing income slabs, tax rates, and benefits of deductions and exemptions) or moving to the new tax regime (with new income slabs, lower tax rates, but without the benefit of most deductions and exemptions).

Some number-crunching will be needed to decide which regime would be better. https://tinyurl.com/newtaxregime

Many small savings schemes — offered by the post office and some banks — are winners in the current tax regime, thanks to their safety (government guarantee) and attractive, effective returns. The prominent schemes in this category are the Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC) and five-year time deposits.

In the current tax regime, the above schemes get the benefit of tax deduction of up to ₹1.5 lakh a year across instruments under Section 80C. But this benefit will not be there in the new regime. So, will these schemes be worthwhile, if you shift to the new tax regime? Yes, even without the tax breaks, most of these schemes will remain attractive, thanks to their relatively higher interest rates. Here’s a scheme-wise analysis.

 

 

 

PPF

Current regime: The 15-year PPF is, by far, among the most popular fixed-income options in the current tax regime. Understandably so. This cumulative instrument (maximum investment of ₹1.5 lakh a year) with annual compounding is open to all Indian residents, offers an attractive interest rate (7.9 per cent pa currently) and enjoys the most favourable tax treatment (EEE — exempt-exempt-exempt).

With the investment eligible for Section 80C deduction, and interest and maturity amounts exempt from tax, the effective return on the PPF currently is enhanced to 13-16 per cent for those in the 20 per cent and 30 per cent tax brackets. For those already in the 5 per cent tax bracket, the effective return is the same as the interest rate — the Section 80C tax break doesn’t add to returns since the full rebate benefit means they anyway don’t have to pay tax.

New regime: In the new regime, with the Section 80C tax benefit not available, the effective return on the PPF for all investors will be the same as the interest rate. Note that the interest and the maturity amount will remain exempt from tax even in the new regime. So, the post-tax return on the PPF will be the same as the interest rate. While the return is lower than the current regime, it is far better than what you can earn on fixed deposits of most banks today (FD interest rates are currently 6-7 per cent, and with this interest income being taxable, the post-tax return is lesser).

Bottomline: The PPF remains an attractive option even in the new tax regime.

Sukanya Samriddhi Yojana

Current regime: SSY, a long-term cumulative investment option with annual compounding available for parents/guardians of young girl children, also enjoys the EEE tax benefit in the current regime. With an interest rate of 8.4 per cent currently, it is a good investment avenue (maximum investment of ₹1.5 lakh a year) with effective interest rate in the mid-teens for those in the higher tax brackets.

New regime: While the Section 80C benefit will not be there in the new regime, the interest earned and maturity proceeds in SSY will be exempt from tax in the new tax regime, too. So, the effective post-tax return for all investors is a healthy 8.4 per per cent currently — higher than the post-tax return on most bank FDs.

Bottomline: SSY remains a good choice in the new regime.

SCSS

Current regime: The five-year Senior Citizen Savings Scheme, available to senior citizens, gets the Section 80C deduction in the current tax regime. But the interest that is paid out quarterly is taxable. However, senior citizens can claim deduction of up to ₹50,000 a year under Section 80TTB in the current regime on interest received from banks and the post office. So, a good portion of the interest earned on SCSS deposits can escape the tax net. The maturity proceeds are exempt from tax.

So, depending on the amount of investment (maximum ₹ 15 lakh), SCSS can enjoy the tax status of EEE or E-part E-E in the current regime. With an interest rate of 8.6 per cent currently, the effective interest rate for those in the higher tax slabs can be in the mid-teens, thanks to the tax breaks.

New regime: With neither the tax benefit under Section 80C (deduction on investment) or Section 80TTB (deduction on interest), the SCSS takes a knock in the new tax regime. But the interest rate (8.6 per cent currently) remains attractive, compared with most bank FDs. The post-tax returns comes down to 7.7-6 per cent for those in the higher tax slabs (10-30 per cent). This is lower than the returns in the current regime, but still better than most other comparable options in the market today.

Bottomline: SCSS, though not as attractive as in the current regime, remains a good choice in the new regime.

National Savings Certificate

Current regime: The five-year NSC, a cumulative investment with annual compounding open to all Indian residents, gets the Section 80C tax break on both investment and interest re-invested in the first four years, in the current tax regime. Thanks to this, the interest rate (7.9 per cent currently) can stand enhanced to the mid-to-high teens. One can invest any amount in the NSC, but the Section 80C break is limited to ₹1.5 lakh a year.

New regime: With no tax break under Section 80C, the NSC’s returns fall in the new regime. The effective pre-tax return is the same for all investors — 7.9 per cent currently. The interest is taxable, and so the post-tax returns comes down to 7-5.4 per cent for those in the higher tax slabs (10-30 per cent). This is lower than the returns under the current regime, but better than most comparable options today.

Bottomline: The NSC’s returns are dented in the new regime, but it is still in the reckoning on returns.

5-year time deposits

Current regime: These deposits, whether cumulative or non-cumulative, enjoy the Section 80C benefit on investment, but not on interest re-invested. So, the entire interest earned is taxable. With an interest rate (7.7 per cent currently offered by the post office, and compounded quarterly), the effective post-tax return can be in the teens. The NSC, comparable to cumulative deposits, could have an edge due to a higher interest rate, Section 80C benefit on interest re-invested in the first four years, and no TDS (tax deducted at source).

New regime: Without the Section 80C tax break, the post-tax return on the five-year deposits comes down to 5.3-7 per cent for those in the higher tax slabs (10-30 per cent). This could be better than many bank FDs, but the NSC could still have an edge due to higher returns.

Bottomline: The NSC will likely continue to score over the tax-saver FD.

Other important factors

One should invest not with the sole goal of saving tax. Rather, the primary goal should be to provide for future goals, taking into account your risk appetite, return expectations, time horizons and liquidity requirement. Tax breaks, if any, can be a sweetener.

From FY21, the quarterly rate reset mechanism on small savings schemes may see fine-tuning and become more aligned with the movement in G-Sec rates, as originally intended. This could mean moderation in rates in the coming quarters. Still, small savings schemes are expected to offer better rates than many other fixed-income options in the market.

That said, some small finance banks, though, are offering attractive rates on deposits (up to 9 per cent for some tenures). With bank deposit insurance hiked to ₹5 lakh from ₹1 lakh in the recent Budget, the safety factor has increased, and investors can consider deploying some money here, too, as part of their fixed-income allocation, especially if they go for the new tax regime.

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Published on February 22, 2020
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