Personal Finance

Why small savings schemes are a big attraction

Maulik Madhu BL Research Bureau | Updated on July 04, 2021

Rates on these schemes have been left unchanged in latest review

Investors in small savings schemes heaved a sigh of relief after the government recently left the interest rates on these schemes unchanged in its latest quarterly review,

Interest rates on these schemes, which include post office (PO) time deposits, the senior citizen savings scheme (SCSS) and the national savings certificate (NSC), were last cut sharply five quarters ago. The rate cut for the April-June 2021 quarter was swiftly withdrawn after its announcement.

Over the past quarter, many banks have slashed their fixed deposit rates by 0.10 to 0.50 percentage points or more. This makes the ultra-safe small savings schemes backed by government guarantee, all the more attractive.

Despite the rates on these schemes getting linked to g-sec yields since 2016, the government has many a time refrained from cutting them in tandem with the fall in g-sec yields. The small savings schemes are overdue for a rate cut based purely on the quarterly reset formula. Investors can therefore, consider locking into the current rates.

You can choose from fixed rate schemes such as the PO term deposits, NSC and SCSS where the rate prevalent at the time of your investment remains applicable for the entire tenure irrespective of any future rate revisions.

PO deposits, NSC

Those looking for safe options in the one-to-three-year tenure range, can go for PO time deposits. The one-year, two-year and three-year PO deposits each offer 5.5 per cent per annum. This is better than the 4.9 - 5.5 per cent p.a. offered by public sector banks on their similar tenure deposits.

The five-year PO time deposit offers 6.7 per cent p.a., significantly higher than the 4.9 - 5.55 per cent offered by public sector banks on similar deposits. Additionally, your investment in the five-year PO time deposit is eligible for deduction under section 80C of the Income Tax Act (up to ₹1.5 lakh). Interest on all the PO time deposits is paid annually but calculated quarterly.

If you have a five-year investment horizon and do not require regular pay-outs, the NSC is your best bet. It offers 6.8 per cent p.a. compounded annually. This is better than the five-year deposit rates of public sector banks. You can invest as little as ₹1,000 and there is no upper limit.

Senior citizen scheme

For individuals above 60 years of age, the SCSS is another 5-year safe investment product. You have the option of extending the maturity by another three years. The interest for the extended period will be the one applicable to the scheme on the date of maturity.

The scheme currently pays 7.4 per cent p.a., payable quarterly. This is far higher than what both private and public sector banks offer on their same-tenure deposits. Most banks offer senior citizens an additional 0.50 percentage point over their usual 5-year FD rates of 4.9 - 6.75 per cent. You can however, invest only up to ₹15 lakh in the SCSS. Investments in NSC and SCSS are eligible for deduction under section 80C of the IT Act.

Published on July 03, 2021

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