From UPSC perspective, the following things are important :
Prelims level : Small saving schemes
Mains level : Read the attached story
Economists expect the Centre to raise the interest rates paid on small savings schemes for the July to September 2022 quarter.
Small Savings Scheme
- Small Savings Schemes are a set of savings instruments managed by the central government with an aim to encourage citizens to save regularly irrespective of their age.
- They are popular as they provide returns higher than bank fixed deposits, sovereign guarantee and tax benefits.
How is it managed?
- Since 2016, the Finance Ministry has been reviewing the interest rates on small savings schemes on a quarterly basis.
- All deposits received under various schemes are pooled in the National Small Savings Fund.
- The money in the fund is used by the Centre to finance its fiscal deficit.
What are the different saving schemes?
The schemes can be grouped under three heads –
- Post office deposits
- Savings certificates and
- Social security schemes
(1) Post Office Deposits
- Under this we have the savings deposit, recurring deposit and time deposits with 1, 2, 3 and 5 year maturities and the monthly income account.
- The savings account currently pays an interest of 4% per annum and can be opened individually or jointly with an initial investment of Rs 500.
- The recurring deposit that pays 5.8% a year compounded quarterly matures after 60 months from the date of opening.
- It allows investors to save on a monthly basis with a minimum deposit of Rs 100 per month.
- Investments under the 5-year time deposit up to Rs 1.5 lakh further qualifies for benefit under section 80C of Income Tax Act.
(2) Savings Certificates
- Under this, we have the National Savings Certificate and the Kisan Vikas Patra.
- The National Savings Certificate pays interest at a rate of 6.8% per annum upon maturity after 5 years. The interest that is earned is reinvested into the scheme every year automatically.
- The NSC also qualifies for tax saving under Section 80C of the income tax act.
- The Kisan Vikas Patra, which is open to everyone, doubles your one-time investment at the end of 124 months signifying a return of 6.9% compounded annually.
- The minimum investment amount is Rs 1000 while there is no upper limit.
(3) Social security schemes
- In the third head of social security schemes, there is Public Provident Fund, Sukanya Samriddhi Account and Senior Citizens Savings Scheme.
a. Public Provident Fund
- The Public Provident Fund is a popular saving option for long term goals like retirement.
- It pays 7.1% a year and qualifies for tax benefit under Section 80C of the Income Tax Act.
- Upon maturity of the account after 15 years, it can be extended indefinitely in blocks of 5 years.
- The accumulated amount and interest earned are exempt from tax at the time of withdrawal.
b. Sukanya Samriddhi Account
- The Sukanya Samriddhi Account was launched in 2015 under the Beti Bachao Beti Padhao campaign exclusively for a girl child.
- The account can be opened in the name of a girl child below the age of 10 years.
- The scheme guarantees a return of 7.6% per annum and is eligible for tax benefit under Section 80C of the Income Tax Act.
- The tenure of the deposit is 21 years from the date of opening of the account and a maximum of Rs 1.5 lakh can be invested in a year.
c. Senior Citizen Savings Account
- And finally, the 5-year Senior Citizen Savings Account can be opened by anyone who is over 60 years to age.
- It carries an interest of 7.4% per annum payable quarterly and qualifies for Section 80C tax benefit.
- These time-tested and safe modes of investments don’t offer quick returns, but are safer when compared to market-linked schemes.