While bank fixed deposit rates are trending down, interest rates of small savings scheme continue to remain high. Small savings rates are reset by the government every quarter depending on the bond yield. Though bond yields have declined almost 65-100 basis points since April 2016, the government has not reduced the rates of small savings to the same extent.
Small savings is one of the most preferred investment options for risk-averse investors and many people depend on these instruments to generate income. As the interest rates are reset every quarter, the next round will be in March and the new rates will be applicable from April.
Public Provident Fund
Public Provident Fund (PPF) remains the most preferred option for individuals. The current interest rate of PPF is 8%. In fact, rate on bank fixed deposit with matching tenure is around 6.5%. 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.
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Deposits made under PPF qualify for deduction from income under Section 80C of the I-T Act, where the ceiling is R1.5 lakh a year. The PPF account matures after 15 years and can be renewed every 5 years thereafter. Analysts say individuals should invest in PPF as it builds a tax-free retirement corpus.
The government has also relaxed the norms for premature withdrawal of the PPF account deposit for reasons such as higher education or treatment of serious ailments. The premature withdrawal will, however, be allowed only after the subscriber’s deposit scheme account has completed five years.
In fact, PPF is meant for those people who do not have any investment plans for their retirement like self employed and professionals as compared with the salaried class who contribute to Employees’ Provident Fund. Non-residents, however, 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.
Sukanya Samriddhi Account
Sukanya Samriddhi Account (SSA) enables parents of girl child to build a corpus for her education and marriage expenses. The account can be opened with a minimum deposit of R1,000, after which the guardian can deposit any amount in multiples of R100. The upper limit of deposit in a financial year is R1.5 lakh. Like PPF, an individual who invests in SSA will get tax deduction at the time of investment every year and even the returns generated will be tax-free. The current interest rate on SSA is 8.5%.
Post office deposits and NSC
The current rate of one-year post office term deposit rate is 7%. Similarly, the five-year post office term deposit rate is 7.8%. In contrast, the rate on bank fixed deposit with matching tenure is 6.5%. The three-year post office deposit rate is 7.3%. The five-year fixed deposit will fetch 7.9% as against 8.5% at present. However, the interest amount earned is taxable according to the individual’s income tax slab.
The interest rate on five-year National Savings Certificate (NSC) is 8%. An individual can invest as minimum as R00 and there is no maximum limit for investment under NSCs. One can use NSCs as collateral to get loans.