Investors are feeling relieved that interest rates on small savings schemes have not been reduced. Bond yields have fallen in the past three months, so logically rates should have been cut. If we go by the formula that links small savings rates to bond yields, the Public Provident Fund (PPF) should not offer more than 7%. However, fears of a backlash from the middle class seem to have prevented the government from reducing rates.
Observers believe the prevailing rates will continue for a few more quarters. "The formula has long been abandoned. Now rates are determined by politics and fixed by the Finance Ministry," says Manoj Nagpal, CEO of Outlook Asia Capital. Even so, investors should not blindly invest in small savings schemes. Each instrument has specific features and one should assess which option best fits into one's financial portfolio. We take a look at the pros and cons of some of the most popular small savings schemes
1. PUBLIC PROVIDENT FUND
Interest rate: 7.8%
Tenure: 15 years (from first investment)
The PPF is the favourite of risk-averse investors who are content with modest but assured returns. Its tax-free status gives it a distinct advantage over fixed deposits. Since interest from fixed deposits is fully taxable, the returns from a 7.5% bank deposit are reduced to barely 5.25% in the highest tax bracket. The only glitch is that there is a cap of Rs 1.5 lakh on the annual investment by an individual.
The best part about the PPF is its longevity. The account has a tenure of 15 years, but can be extended in blocks of five years indefinitely. After 15 years, the investor has three options: withdraw the corpus, continue with the account without further contributions or continue investing in the account. If you choose to continue investing in it, you have to submit an application for extending the account tenure for a block of five years. The application (Form H)has to be submitted within a year from the maturity date. After five years, the account tenure can be further extended for another five years.
If one doesn't submit an application for tenure extension, the PPF account tenure automatically gets extended but the investor cannot make further contributions to it. The balance in the account will continue to earn interest, but the investor will no longer be required to contribute the minimum Rs 500 in the account every year. Once this option of continuing without contribution has been selected, the subscriber cannot alter it to make further contributions to the account.
The PPF suits non-salaried people who are not eligible for retiral benefits. Self-employed professionals such as doctors, architects and chartered accountants should use it to build the debt portion of their retirement nest egg. Ashmeet Narula has been investing in the PPF for the past 13 years and intends to keep extending it till she retires.
in Pic: Ashmeet Narula 38, Doctor, Noida
Being a self-employed professional, she is not covered by the Provident Fund. Therefore, she has been investing in the PPF for the past 13 years. Also invests in the Sukanya Samriddhi Yojana for her daughter.
Not everybody is a fan of the PPF. "If you are young and looking to save tax, the PPF is not a great option. Other tax saving instruments such as ELSS funds have given far higher returns," says Dhirendra Kumar, CEO of Value Research. Mumbai-based Deepak and Kavita Wagh have stayed away from the PPF for precisely this reason. "Both of us contribute to the Provident Fund so there's no need to invest more in debt," says Deepak. Instead, they have pure protection insurance policies and SIPs in ELSS funds to save tax.
In Pic: Deepak and Kavita Wagh, 38 and 31, Salaried professionals, Mumbai
As they are covered by the Provident Fund, the Waghs don't feel the need to invest more in debt. Instead, they invest in equity funds and have recently opened NPS accounts to save for retirement.
2. SUKANYA SAMRIDDHI YOJANA
Interest rate: 8.3%
Tenure: 14 years
If you have a daughter below 10 years, the Sukanya Samriddhi Yojana is a better option than the PPF because it offers a higher interest rate. Like the PPF, the interest earned is tax free and there is an annual cap of Rs 1.5 lakh on the investment. Accounts can be opened in any post office or designated banks with a minimum investment of Rs 1,000. A parent can open an account for a maximum of two daughters, but the combined investment in the two accounts cannot exceed Rs 1.5 lakh in a year.
Some experts argue that the debt-based Sukanya scheme is not the best way to save for a longterm goal. This is true, because equity-based options can deliver higher returns. This is why experts advise that the SSY should be used in combination with other investments, such as equity funds, for saving for a child's future goals. The good part is that the girl child tag lends a sense of purpose to the investment. The maturity proceeds of other investments are often squandered. On the other hand, the Sukanya scheme helps a family save the daughter's education and marriage.
3. NATIONAL SAVINGS CERTIFICATES
Interest rate: 7.8%
Tenure: 5 years
Unlike the PPF, there is no cap on investments in the NSC. But the interest is fully taxable. The posttax returns to 5.38% in the highest 30% bracket, which is comparable with the returns of bank fixed deposits. The only difference is that the interest accruing on NSCs every year is also eligible for tax deduction. Suppose you buy NSCs worth Rs 50,000 and claim tax deduction this year. The following year, you can claim deduction for the Rs 3,900 that accrues as interest in the first year. In the third year, you can claim deduction for Rs 4,204 as interest gets compounded.
NSCs fell out of favour when bank rates were higher at 9-9.5% a few years ago. But deposit rates have fallen in the past two years and especially after demonetization. Though banks offer senior citizens higher rates, for regular investors the deposit rates are now 7-7.2% (See page 25). This makes the NSCs more attractive. But go for them only if you are ready to stand in long queues at the Post Office and put up with the laxity of the government staff.
4. SENIOR CITIZENS' SAVING SCHEME
Interest rate: 8.3%
Tenure: 5 years
Another bestseller from the Post Office, this scheme gives out regular income to retirees. The tenure of the scheme is five years, which is extendable by another three years. However, there is a Rs 15 lakh overall investment limit per individual. Also, the scheme open only to investors above 60. In some cases, where the investor has opted for voluntary retirement and has not taken up another job, the minimum age is relaxed to 58 years. There is also no age bar for defence personnel. They can invest in the scheme even before 60 as long as they satisfy the other requirements.
Experts say the Senior Citizens' Savings Scheme should be the first option for retirees looking to park their life savings. "It offers assured returns and regular income. These are critical requirements of most retirees," says Nagpal. This is what made Faridabad-based retired PSU manager Mangal Dutta Sharma park Rs 15 lakh of his retirement proceeds in the scheme. The remaining is invested in bank deposits and the Post Office Monthly Income Scheme to earn a monthly income.
In Pic: Mangal Dutt Sharma 67, Retiree, Faridabad
This retired PSU manager wants regular and assured income from his investments. He has put the maximum Rs 15 lakh in the Senior Citizen's Scheme and another Rs 4.5 lakh in the Post Office Monthly Income Scheme..