Big Story. Big savings in small packages

As one of the safest and most attractive long-term debt options, the Public Provident Fund (PPF) has become more lucrative with the government increasing the interest rate for the October-December quarter to 8 per cent. In addition, the tax benefits of the product makes it a must-have for most investors’ portfolios.

PPF is a debt product spread over a period of 15 years, and is ideal for saving towards long-term goals. You can invest up to ₹1.5 lakh every year over this period. Interest rates are revised every quarter for the instrument. You need to invest a minimum of ₹500 every year to keep your account active.

The current rate is 8 per cent, compounded annually. The amount invested in PPF is eligible for tax deduction under Section 80C — the accumulated interest and the final maturity amount are both fully exempt from taxes. If the 8 per cent rate sustains, the effective annual yield for a person paying 31.2 per cent tax (30 per cent rate, plus 4 per cent cess) would be around 11.9 per cent, making it a highly attractive option for those in the higher tax slabs. Even if interest rates are lowered and yields come down a bit, PPF returns would still compare favourably with most debt funds and bond instruments.

Importantly, the 15 years are counted from the end of the financial year in which the first instalment was paid. So if you open a PPF account on October 1, 2018, the 15-year tenure starts from April 1, 2019, and the maturity would be on April 1, 2034.

You can take a loan against your PPF balance. From the third to the sixth financial year after opening your account, you can take a loan for up to 25 per cent of your balance two years before the year you wish to borrow. The loan needs to be repaid within three years of taking it. Partial withdrawals are also allowed from the seventh year, subject to limits.

You can open a PPF account in any post office or financial institution such as SBI, HDFC Bank, ICICI Bank, PNB and Axis Bank. Some of them also allow you to open the account online. You can transfer your PPF account to a different branch.

After the recent tweaks to small savings schemes, National Savings Certificates (NSCs) now offer an interest rate of 8 per cent. For NSCs, the interest rate prevailing at the time of investment holds till maturity.

The minimum investment in the scheme is ₹100; additional investments can be made in multiples of ₹100 with no cap. It has a five-year lock-in period and the interest, compounded annually, is paid only at the time of maturity.

Investment under the scheme is eligible for tax deduction of up to ₹1.5 lakh under Section 80C of the Income Tax Act. The interest earned on NSCs is considered a reinvestment and is eligible for tax deduction. TDS (tax deducted at source) is also not applicable on the scheme.

However, as the last (fifth) year’s interest will not be reinvested, and will be paid at the time of maturity, the last year’s interest alone is taxable in the hands of the taxpayer.

The scheme can be compared with the post office five-year time deposit scheme and tax-saving fixed deposit schemes of various banks. While the former offers only 7.8 per cent, five-year tax-saver deposits offer higher rates than NSCs. For example, Deutsche Bank and IDFC Bank offer the highest rate of 8.5 per cent on tax-saver deposits. But the tax levied on interest reduces your returns from bank deposits and makes NSC a superior option. This pushes up the post-tax yields on NSCs. Also, as NSCs are guaranteed by the government, they are much safer than bank FDs.

Remember that interest on NSCs should be shown under the head ‘Income from other sources’ in your income-tax return every year. That said, the investment and interest that will be claimed as deduction under Section 80C effectively nullifies the tax payable.

NSCs can be purchased at any post office.

There are different modes of holding the certificate — Single Holder Type certificate, held by an investor for self or on behalf of a minor; Joint A Type certificate, held by two investors with equal share of maturity proceeds; and Joint B Type certificate, in which maturity proceeds are paid out to only one of the holders.

After the recent upward revision of interest rates on small savings schemes, Senior Citizen Savings Scheme (SCSS) has become a must-have for seniors. For the October-December 2018 period, SCSS offers an interest rate of 8.7 per cent, which is 40 basis points higher than the earlier quarter.

Those who put money into the scheme during the October 1-December 31 period will be able to lock into this rate until it matures in five years. A maximum of ₹15 lakh can be invested. Its risk-free status and quarterly pay-out of interest makes it a good option for seniors looking for regular income. Tax deduction under Section 80C for investments of up to ₹1.5 lakh is an added feature

SCSS scores over most other low-risk, regular-income options in the fixed-income category. Barring IDFC Bank, which offers 8.75 per cent for seniors on its five-year deposits, other banks offer interest rates of only 6.5-8.25 per cent for seniors on their five-year deposits. Pradhan Mantri Vaya Vandana Yojana, a scheme that pays regular pension to seniors, gives a maximum return of just 8-8.3 per cent for an investment of up to ₹15 lakh for 10 years.

Individuals aged 60 or more (those aged 55-60 allowed on superannuation or VRS) can open multiple SCSS accounts at various time periods, provided the total amount invested across accounts doesn’t exceed ₹15 lakh. Hence, staggering your investments, if possible, may help when interest rates are on an upswing.

The scheme can be extended by three years after maturity. Premature closure is allowed on deduction of an amount equal to 1.5/1 per cent of the deposit, after one/two years of the deposit, respectively. Interest will be taxed at the slab rate. TDS is applicable if the interest exceeds ₹10,000 a year.

You can invest through any post office or select branches of several public sector banks such as SBI, Bank of India, Central Bank and Union Bank, or ICICI Bank, among private banks.

Filling out the application form along with submission of photograph, address and identity proof is required. If your income is below the taxable limit, you can submit Form 15H to avoid TDS.

Even before the latest rate hike, Sukanya Samriddhi Yojana was among the best products for those looking for safe investments for the education and wedding of their daughters.

The hike in interest rate on the product from 8.1 per cent to 8.5 per cent for the October-December 2018 quarter sweetens the deal further.

Sukanya Samriddhi Yojana has much going for it. One, its interest rate is higher than most other small savings schemes and comparable products. Two, it enjoys the most favourable tax treatment (exempt-exempt-exempt) that significantly improves its effective returns.

If you are a parent or guardian of a girl child less than 10 years of age, Sukanya Samriddhi Yojana should be your first port of call in the fixed income category. Only one account can be opened for a girl child, and accounts can be opened for maximum two girls in a family, including adopted children aged less than 10 years.

The interest rate can change every quarter and the new rate will apply to the accumulated corpus. Compounding happens on a yearly basis. The minimum yearly investment in the account is ₹250 (earlier, it was ₹1,000), while the maximum is ₹1.5 lakh. The investments must be done every year for 15 years and the account matures on completion of 21 years from the date of opening. Interest will accrue in the account every year till maturity. You can make any number of deposits in a year, and deposits made until the 10th of each month are eligible for interest for that month.

Say, the rate remains at 8.5 per cent, and each year, ₹1.5 lakh is put in the account. After 15 years of deposits and holding for the remaining period till 21 years from the account opening, the accumulated balance will be about ₹75 lakh. At 8.1 per cent, the accumulated balance would have been about ₹71 lakh.

Investment of up to ₹1.5 lakh a year in Sukanya Samriddhi Yojana is eligible for tax deduction under Section 80C. Also, interest earnings and maturity amount are exempt from tax. This highly preferential tax treatment boosts the effective return.

Partial withdrawal for higher education — up to 50 per cent of the account balance at the end of the preceding financial year — is allowed if the girl has turned 18 or has passed 10th standard, whichever happens earlier. Closure of account and withdrawal for wedding is allowed after the girl turns 18.

You can open a Sukanya Samriddhi Yojana account at authorised branches of the post office or commercial banks. While you need to visit the post office or bank and submit documents to open the account, it can be operated online thereafter if the post office/bank branch has access to the core banking solution facility.

If you want capital safety and a regular stream of monthly income, one of the options you can look at is Post Office Monthly Income Scheme (POMIS). The interest rate for the scheme has been reset at 7.7 per cent per annum (7.3 per cent earlier) for the period from October 1, 2018, to December 31, 2018.

Post office MIS is a government-backed savings scheme which can be opened from any post office. The tenure of the scheme is five years and the interest is payable on a monthly basis. Individuals, either single or jointly, can open the account. The minimum investment amount is ₹1,500, and the maximum limit is ₹4.5 lakh in a single account and ₹9 lakh in a joint account.

POMIS scores over other similar investment options such as fixed deposits offered by banks and corporates, on safety and rate of return.

There is no default risk attached to the capital invested in POMIS as it is backed by the government. On the other hand, bank deposits of up to only ₹1 lakh are safe and secured by the deposit insurance. FDs offered by corporates carry relatively higher default risk.

The rate of interest in POMIS is reset periodically by the government based on the prevailing interest rates in the market. The current rate of 7.7 per cent is relatively higher than the interest rates offered by most banks for their five-year FDs with the monthly pay-out option, including SBI (6.85 per cent) and ICICI Bank (7.25 per cent). Meanwhile, corporate FDs offer slightly higher rates for their five-year FDs as they are exposed to credit risk. The rates offered by some highest-rated AAA corporate FDs include 8.05 per cent (HDFC) and 8.13 per cent (Bajaj Finance).

On the taxation front, POMIS and FDs offered by banks/corporates do not enjoy any tax benefit — the interest is fully taxable as per the investor’s tax slab and no Section 80C benefit is available on the amount invested. However, there is no TDS on the interest pay-out from POMIS. Premature withdrawal is allowed in POMIS only after a year, but you have to pay a penalty for doing so, similar to bank and corporate FDs.

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