As Indians, we love to save. Programs like banking inclusion have ensured that almost every Indian saves money. Besides, the Central Government manages several small savings schemes to encourage its citizens to save money, regardless of their age. These small savings schemes provide better returns than bank deposits and come with a sovereign guarantee. Besides, tax benefits are available in such Central Government managed savings schemes. This article explores these savings schemes in detail and discusses their benefits, including the interest rates that the Government offers.
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Are bank accounts a small savings scheme?
Banks offer a range of savings instruments, including the savings bank account, FD, and recurring deposit accounts. But, contrary to what many people think, these instruments do not come under the nomenclature, small savings scheme.
You can argue that these facilities offer scope for savings, and hence they should classify as small savings schemes. However, the definition of a small savings scheme does not allow bank deposits to be classified as thus.
Chit funds are small savings but do not fall under the small savings scheme guaranteed by the Government.
What is a small savings scheme?
Small savings schemes constitute various saving instruments managed by the central government. The central government management of these deposits distinguishes small savings schemes from bank deposits.
Besides, investment in small savings schemes offers tax benefits. However, one should note that even banks offer a specific Tax-saving FD scheme where investors can get tax benefits under Sec 80C.
The characteristics of small savings schemes are as follows.
- The Central Government manages these schemes.
- All these deposits get pooled into the National Small Savings Fund.
- The Central Government uses this money to finance its fiscal deficit.
- The small savings scheme deposits offer tax benefits and come with a sovereign guarantee.
- The Central Government reviews the small savings interest rates quarterly.
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The Different Types of Small Savings Scheme Deposits
Small savings scheme deposits are categorized under three prominent headings.
- Post office deposits – Post Office offers different types of accounts like savings, recurring deposits, fixed deposits (maturities 1 to 5 years), and monthly interest-earning accounts.
- Savings certificates – These accounts include NSC (National Savings Certificate) and KVP (Kisan Vikas Patra).
- Social security schemes – These schemes include PPF (Public Provident Fund), Senior Citizen Savings Scheme, and Sukanya Samriddhi Account.
Generally, the Post Office manages all the small savings schemes. However, people can open PPF accounts in banks.
Before exploring the individual small savings schemes in detail, let us know the interest rate offered on these schemes.
Small Savings Interest Rates
We had mentioned before that the Central Government manages these small savings schemes and reviews the interest rates quarterly.
- The Central Government has not altered the interest rates on the government-backed small savings instruments for the first quarter of 2022-23.
- The interest rates for the first quarter of FY23 are the same as that of the fourth quarter of FY22.
- However, the interest rate of the Employees Provident Fund Organization (EPFO) has been cut to 8.1% from 8.5%. Please note that these deposits do not qualify as a small savings scheme.
Here is the small savings schemes interest rate applicable for the first quarter of FY23.
|Small Savings Scheme Instruments||Rate of Interest – (April – June 22 quarter) in % per annum|
|Post Office Savings Bank Deposits||4.0|
|Post Office 1-YR Time Deposit||5.5|
|Post Office 2-YR Time Deposit||5.5|
|Post Office 3-YR Time Deposit||5.5|
|Post Office 5-YR Time Deposit||6.7|
|Post Office 5-YR Recurring Deposit||5.8|
|Senior Citizen Savings Schemes||7.4|
|Monthly Income Account||6.6|
|National Savings Certificate (NSC)||6.8|
|Public Provident Fund (PPF)||7.1|
|Kisan Vikas Patra (KVP)||6.9|
|Sukanya Samriddhi Account Scheme||7.6|
Small Savings Schemes in Detail
Here are the different Central Government-managed small savings schemes.
Post Office Savings Bank Account
The Post Office Savings Bank Account is similar to a bank savings account. Here are its characteristics.
- Individuals can open savings accounts in single or joint names. A minor more than ten years of age can open an account in their single name.
- Guardians can open accounts on behalf of minors and persons of unsound mind.
- Conversion of a single to a joint account and vice versa is not allowed.
- Nomination is mandatory when opening a savings account.
- The minimum deposit is Rs 500, and subsequently in multiples of Rs 10. There is no maximum limit stipulated on the deposit amount.
- The minimum withdrawal is Rs 50. However, one should ensure the maintenance of a minimum balance of Rs 500 in the account.
- Interest calculation is the same as they do in the banks. Interest in savings accounts is exempt from tax up to Rs 10,000 in a financial year.
- Other facilities include cheque book, ATM, internet banking, mobile banking, Atal Pension Yojana, PMSBY, and PMJJBY.
Post Office National Savings Recurring Account
The recurring account allows people to deposit money monthly. Hence, it qualifies as an excellent small savings instrument.
- The account opening eligibility criteria are the same as savings accounts.
- The minimum monthly deposit is Rs 100 and subsequently in multiples of Rs 10. There is no maximum amount.
- If the account holder does not pay the deposit monthly, it is a default attracting a penalty of Rs 1 per Rs 100. The account is discontinued after four defaults. However, the deposit holder can revive the account within two months,
- Deposit holders can make an advance payment for up to five years.
- A loan facility and premature closure of the deposit are available.
- The maximum maturity period is five years, but it can be extended once for a further five-year period.
Post Office Time Deposit Account
These accounts are similar to the fixed deposits you open with banks.
- The account opening criteria for the time deposit account are similar to the savings account.
- The minimum deposit is Rs 1000 and after that in multiples of Rs 100. There is no stipulation of a maximum deposit amount.
- The deposit tenure can be 1-yr, 2-yrs, 3-yrs, and 5-yrs.
- The interest is calculated quarterly but payable annually.
- Premature payment is allowed after six months of opening the account.
- The time deposit receipt can be pledged as collateral with the government, scheduled banks, co-operative banks, co-operative societies, local authorities, and housing finance companies.
Post Office Time Deposit Account – Monthly Income Scheme
This small savings scheme is similar to the time deposit scheme, but the interest is paid monthly into the savings account. The minimum opening amount is Rs 1000 and after that in multiples of Rs 1000. The maximum deposit allowed in a particular name is Rs 4.5 lakhs. Premature withdrawal of the deposit is permitted after one year of opening the account.
Senior Citizens Savings Scheme Account
It is similar to the senior citizen deposit schemes in banks.
- An individual should be 60 years of age or above when opening the account. However, a relaxation of five years is available for retired civilians if they invest within one month of receiving retirement benefits. Similarly, retired defense employees have a relaxation of ten years.
- Joint accounts are allowed with the spouse alone.
- The minimum deposit is Rs 1000 and in multiples of Rs 1000. The maximum deposit in all such accounts of the individual should not exceed Rs 15 lakhs.
- These deposits qualify for the benefit of Sec 80C of the IT Act.
- The maximum maturity period is five years, extendable by another three years.
- Premature payment is allowed after one year of opening the account. A penalty is applicable.
Public Provident Fund (PPF) Account
The PPF account is opened at post offices and banks across India.
- Individuals can open this account singly. However, the guardian can open a PPF account on behalf of a minor or someone with an unsound mind.
- The minimum deposit is Rs 500, and the maximum is Rs 1.50 lakhs in a particular financial year.
- The failure to pay Rs 500 in a financial year results in the discontinuation of the PPF account. However, the account holder can revive the account by depositing the minimum amount of Rs 500 plus Rs 50 for each defaulted year.
- Interest is payable quarterly.
- PPF deposits qualify for tax benefits under Sec 80C.
- Loans are available after one year of opening the account. One premature withdrawal is allowed after five years, with a ceiling of 50% of the balance outstanding at the end of the 4th preceding year or the preceding year, whichever is lower.
- The maturity is 15 years, excluding the year in which the account was opened. Premature closure is allowed under specific circumstances after five years of the original date of the deposit.
Sukanya Samriddhi Account
This small savings scheme account is for the benefit of the girl child below ten years of age.
- The girl’s guardian under ten years of age can open the account in a post office or a bank. This facility is allowed for a maximum of two girls. Under exceptional circumstances, opening more than two accounts is permitted.
- The minimum deposit in a particular financial year is Rs 250, subsequently in multiples of Rs 50, with the cumulative maximum allowed in a year, Rs 1.50 lakhs.
- The maximum period is 15 years from opening the account.
- The account is treated as default if the minimum deposit of Rs 250 is not made in a year.
- The deposits qualify for tax deduction under Sec 80 of the IT Act.
- The guardian can operate the account until the girl attains 18 years of age.
- Withdrawal is allowed up to 50% of the balance outstanding at the end of the preceding year.
- Premature closure is allowed under specific circumstances. However, the account stands closed after 21 years of opening the account or at the time of the girl’s marriage after attaining 18 years of age.
National Savings Certificate (NSC)
NSC is a fixed deposit account that qualifies for tax savings under Sec 80 of IT Act.
- Individuals can open NSC singly and jointly (maximum of three persons). In addition, the guardian can open the account on behalf of a minor or person with an unsound mind.
- The minimum deposit is Rs 1000 and subsequently in multiples of Rs 100. There is no maximum stipulation.
- The deposit is for five years.
- The NSC can be pledged to a bank as collateral for a loan.
- Premature closure of NSC is not allowed, except under specific circumstances.
- It is not transferable except under specific circumstances.
Kisan Vikas Patra (KVP)
Kisan Vikas Patra is similar to the NSC in many ways. The difference is the treatment of the deposit. The Government uses these funds for the development of the agriculture sector.
- The account opening eligibility criteria are the same as that of the NSC.
- The minimum amount is Rs 1,000 and in multiples of Rs 100, with no maximum stipulation.
- The Ministry of Finance prescribes the maturity period of the KVP.
- KVP can be pledged to banks as collateral for loans.
- Premature closure and transfer of deposit are allowed under specific circumstances alone.
PM Cares for Children Scheme – 2021
This scheme was available until 28.02.2022. Now it has been discontinued.
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Benefits of small savings schemes
Besides encouraging everyone to save money, the small savings schemes offer specific benefits.
- The funds are used for national development and meeting the fiscal deficit.
- The Central Government guarantees the repayment of small savings scheme deposits.
- The interest rate depends on various factors. However, the Government manages and reviews the rates every quarter.
- The interest rates offered on these small savings deposits are higher than what banks offer on their savings deposits.
Hence, small savings schemes are beneficial to every investor.
We trust that we have clarified everything about what small savings are and how one can invest in these instruments and help in national development.