In order to make investments in small savings simpler and hassle free, the government has allowed banks, including private ones (ICICI Bank, HDFC Bank and Axis Bank) to accept deposits under various schemes such as National Savings Certificates (NSC), recurring deposits and monthly income scheme (MIS). At present, banks receive deposits under Public Provident Fund, Sukanya Samriddhi Account and Senior Citizen Savings Scheme-2004. The government’s move will result in higher mobilisation under the scheme as the interest rates in small savings are higher than bank deposits of similar maturities. Since April 2016, the interest rates for small savings schemes are reset every quarter depending on the bond yield. In September this year, the government did not change the interest rates on small savings schemes for the October-December quarter despite the fact that bond yields have fallen in the past three months.
The government has also made Aadhaar mandatory for all small saving schemes. All existing depositors have been given time till December 31, 2017 to provide the 12-digit unique identification number and link it with their accounts.
Monthly Income Scheme
The five-year Post Office Monthly Income Scheme (MIS) is a popular scheme to generate assured monthly cash flow. An individual can invest `4.5 lakh and joint account holders `9 lakh. At present, the interest rate on MIS is 7.5% per year and interest is paid every month. The capital is completely protected as it is backed by the government. Account can be transferred from one post office to another. Any number of accounts can be opened subject to maximum investment limit by adding balance in all accounts. Premature closing of the account is permitted with penalty. One needs to open a post-office savings account to link the monthly payout from the MIS account. The interest income is taxable but there is no tax-deducted-at-source.
National Savings Certificate
The 5-year National Savings Certificates offer tax exemption under Section 80C of the Income Tax Act for investment up to Rs 1.5 lakh. There is no limit for investment and the certificates can be given as collateral to get a loan from banks. The current interest rate is 7.8% per year. It is an ideal investment for retirement if purchased in planned duration. After maturity the amount is deposited in savings bank account. The interest on NSC is accounted every year as income from other sources and the amount is reinvested and credit is taken for the reinvestment by way of deduction under Section 80C. As there will be no reinvestment in the last year of the scheme, the deduction under Section 80C will not be available and the interest for the year will need to be offered to tax. If the interest accrued in the previous years has not been offered to tax on accrual basis, the entire interest income will be taxable on receipt basis, provided, the interest income exceeds the basic exemption limit as per the income tax laws. Further, as no taxes are deducted at source on interest from NSC, it is advisable to pay tax on advance tax method.
One can now also start a 5-year recurring deposit under small savings scheme in a bank. Any mumber of accounts can be opened and there is no limit on the amount of monthly investment. The current interest rate is 7.1% per annum. An account can be opened in the name of minor and nomination facility is available at the time of opening the account. One withdrawal up to 50% of the balance is allowed after one year. If there is a monthly
default, the depositor has to first pay the defaulted monthly amount along with the default fee and then pay the current month deposit. A recurring deposit is ideal if one has an MIS and do not want to take out the monthly payout. The money can be reinvested in the RD account provided one has a post office savings bank account.