Small savings: Small steps, big gains

Written by Saikat Neogi | New Delhi | Updated: Jul 22 2014, 15:52pm hrs
To revitalise small savings, finance minister Arun Jaitley proposed certain measures which would revive the interest of risk-averse investors to put money in post offices. Jaitley raised the investment limit of Public Provident Fund (PPF) to R1.5 lakh per annum from R1 lakh, proposed to reintroduce the once-popular Kisan Vikas Patra (KVP) and also announced a special small saving tool to cater to the requirement of education and marriage of the girl child. Also, a National Savings Certificate (NSC) with an insurance cover will be launched to provide additional benefits to small savers.

For individuals, PPF is the most preferred investment option as it is backed by the government, is tax-exempt at all stages, and currently gives a return of 8.7% per annum, compounded yearly. A resident Indian can open a PPF account, and the subscriber can even open another account in the name of minors, but the maximum investment limit will be R1.5 lakh by adding balance in all accounts. Deposits made under PPF qualify for deduction from income under Section 80C of I-T Act, where the ceiling has now been proposed to rise to R1.5 lakh from R1 lakh per year. The PPF account matures after 15 years and can be renewed every 5 years thereafter.

Non-residents cannot open a new account, but can continue their existing accounts till its maturity, without extensions. While premature closure of account is not allowed, one can withdraw money every year from seventh financial year from the year of opening the account. One can avail loan against PPF from the third financial year and the money invested in PPF cannot be attached under any court order. One can deposit in lump-sum or can even make 12 transactions a year and the minimum investment amount is R500 per year. If one fails to make a deposit in any given year, a penalty of R50 for each year of default and the minimum amount of R500 will have to be paid.

In small savings, NSC of 5 and 10 years maturities are one of the most preferred investments options. NSCs offered by the post office are government-guaranteed and is a tax savings option for the investor. The interest is compounded and is returned along with the principal amount on maturity. The minimum amount that can be invested in NSCs is R100 and one can buy certificates in denominations of R500, R1,000, R5,000 and R10,000. Moreover, there is no limit for investment in this instrument. So if one invests R100 in a 5-year NSC, he will get R151.62 after 5 years and in a 10-year NSC, the investor will get R236.60 after maturity. An investor can avail tax deduction under Section 80 C, which has been revised to R1.5 lakh per annum, and the annual interest earned is deemed to be reinvested and thus qualifies for deduction under Section 80 C too. An investor can transfer the certificates from one post office to another and duplicate certificates are issued in case they are lost or stolen. For security, post offices also paste the photograph of the investor on every certificate issued.

The 5-year monthly income scheme (MIS) is one of the popular investment tool for those seeking a regular income flow every month. On a single account, one an invest up to R4.5 lakh and up to R9 lakh in the case of a joint account and it gives a return of of 8.4% on maturity. For those who want to reinvest the monthly interest income, they can open a recurring deposit account for five years, which will give an interest of 8.4% compounded quarterly. One can give instructions to the post office to automatically transfer the interest income of the MIS to the post office savings bank account and then to the recurring deposit account.

For senior citizens, the post office senior citizen savings scheme is a popular option as it offers 9.2% interest paid every quarter. The minimum age of opening the account is 60 years, or 55 years in case the person has retired under the superannuation or the VRS scheme. One can invest up to R15 lakh and the maturity period is 5 years. Even after maturity, the account can be extended for further three years within one year of the maturity. While a subscriber can claim tax benefits under Section 80C of the I-T Act, TDS will be deducted if the interest amount is more than R10,000 per annum.

The Budget has proposed to relaunch KVP, which was discontinued since December 2011 as per the

recommendations of the Shyamala Gopinath committee on Comprehensive Review of National Small Savings Fund. In the earlier version of KVP, the money invested used to double in eight years and seven months. The two most popular instrument MIS and KVP together accounted for nearly a half of the total outstanding in postal savings as at end of March 2010. The panel noted that KVPs were quite expensive in terms of the effective cost to the Centre and are prone to misuse being a bearer-like instrument.