Post office deposits still offer higher returns than other small savings schemes

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Published: April 2, 2019 1:10:10 AM

The tenure of the deposit is 21 years from the date of opening of the account. Maximum period up to which deposits can be made is 15 years from the date of opening of the account.

For SSA, the effective returns post tax would be 11.1%.

The government has kept the interest rates of small savings schemes unchanged for the quarter April 1-June 30, 2019 from those notified for January to March of this year. The government resets the interest rates of small savings every quarter depending on the bond yields.

The interest rate of Public Provident Fund (PPF) will be 8%, Sukanya Samriddhi Account (SSA) will be 8.5% and Kisan Vikas Patra 7.7%. One-year post office term deposits will continue to get interest of 7% and 5-year deposits will get 7.8%.
Higher returns from small savings

Risk-averse investors prefer to invest in small savings schemes like PPF and SSA for fixed returns and tax benefits. In case of post office term deposits, the interest rates are higher than bank deposit rates. For instance, while the interest rate on a 5-year post office deposit is 7.8% of April-June quarter, SBI is offering 6.85% for its 5 years and up to 10 years fixed deposits. The gap between the small saving interest rate —average of PPF and SSA rate—and the average bank term deposit (>1 year) remains around 98 basis points. In small savings, PPF and SSA are two most popular schemes for its tax benefits and long-term fund accumulation. Subscribers get tax deduction of up to `1.5 lakh under Section 80C of Income Tax Act and the returns are also tax-free. At 8% interest rate for PPF, an investor in the 30% tax bracket will get a return of 10.4% a year. For SSA, the effective returns post tax would be 11.1%.
Returns from other schemes such as National Savings Certificates (NSC), Kisan Vikas Patra and term and recurring deposits are taxable. However, investors get tax break of up to `1.5 lakh for investments in NSC and even bank deposits for five years and above. Returns from banks deposits are, however, taxable.

Growing popularity

In fact, the popularity of small savings can be seen from the rising collections. In FY17, gross collections grew 16% year-on-year (y-o-y) to `5,16,000 crore and in FY18, it grew 15% to `5,92,710 crore. In FY19, till November 2018, the gross collection is `4,01,060 crore. In case of SSAs, till December 2018, 1.56 crore accounts were opened since launch of the scheme on January 22, 2015 by prime minister Narendra Modi at Panipat in Haryana. The accounts can be opened at any India Post office or branches of some authorised commercial banks. Post offices account for 86% of the accounts in operations. The total amount deposited in SSAs till December 2018 is `31,064 crore.

Operating small savings account

Opening small savings account is hassle-free. A resident Indian can open a PPF account and even a second account in the name of minors, but the maximum investment limit will be `1.5 lakh for all accounts taken together.

A natural/ legal guardian on behalf of a girl child can open a SSA. Up to two girl children or three in case of twin girls as second birth or the first birth itself will be considered. Account can be opened up to age of 10 years only from the date of birth. The tenure of the deposit is 21 years from the date of opening of the account. Maximum period up to which deposits can be made is 15 years from the date of opening of the account.

Partial withdrawal, maximum up to 50% of balance standing at the end of the preceding financial year, can be taken after the account holder attains 18 years. Normal premature closure will be allowed after completion of 18 years /provided that the girl is married. Premature closure is allowed in the event of death of the depositor. For PPF and SSA, individuals will have to invest at least `500 and `250, respectively in a financial year (by end of March). If that is not done then the account becomes dormant.

Kisan Vikas Patra can be purchased from any post office by an adult for himself or on behalf of a minor or by two adults. The certificate can be transferred from one person to another and from one post office to another. In case of NSC, deposits qualify for tax rebate under Section 80C, the interest accruing annually but deemed to be reinvested.

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