About Small Savings Schemes
- They are designed to provide safe and attractive investment options to the public and at the same time to mobilise resources for development.
- Beneficiary: Conservative investors and those who have retired or are nearing retirement rely mostly on small savings schemes, monthly income schemes or fixed deposits.
- Calculation of Interest Rates: Method to calculate interest rates for small savings schemes has been provided by the Shyamala Gopinath Committee.
- The committee had recommended that the interest rates of various schemes be 25 to 100 basis points higher than the yields of similar maturity government bonds.
- As per Reserve Bank of India guidelines, the rates on these small savings schemes are calculated on the yields on government securities (G-secs).
- The interest rates of savings schemes are decided by the government and vary every 3 months to a year. Reference period for small savings rates for the January-March quarter is September-November.
- National Small Savings Fund (NSSF): All deposits received under various small savings schemes are pooled in this Fund.
- Money in the fund is used by the central government to finance its fiscal deficit.
- Categories of small savings schemes: They can be grouped under 3 categories as below:
- Post Office Deposit: It includes savings, recurring, and time deposits with 1, 2, 3, and 5-year maturities and the monthly income account.
- Savings Certificates: These are the two investment options; National Savings Certificate (NSC) and Kisan Vikas Patra (KVP)
- Social Security Schemes: This includes Public Provident Fund (PPF), Senior Citizens Savings Scheme (SCSS), and the Sukanya Samriddhi Yojana.
Popular Category of Small Saving Scheme
- Public Provident Fund: This works as a provident fund for the adults as well as minorities.
- The PPF has lower limit of balance holding INR 500 and upper limit of INR 1.5 Lac.
- The maturity time of PPF account is 15 years.
- Post Office Recurring Deposit: Post Office RD is a saving scheme that can be continued with Indian Postal Offices.
- In this scheme minimum balance of Rs. 10/- should be maintained every month.
- Post Office Fixed Deposit: Fixed deposits in Post Offices are same as the banks.
- The difference is the minimum amount here is INR 200/- unlike the other commercial banks.
- Kisan Vikas Patra: This is another small saving scheme that can be purchased from the PO.
- The patra or certificate costs INR 1000/- (minimum).
- The maturity time is 113 months.
- Sukanya Samriddhi Yojana Scheme (SSYS): It is a government-backed deposit programme for girls.
- It was introduced as a part of the “Beti Bachao Beti Padhao” campaign, aids in providing for a girl child’s financial needs and offers income-tax advantages under section 80C.
Highlight of Recent Hike
- According to the revised rates, beneficiaries will earn 7.00%, 8.00%, and 7.10% interest from National Savings Certificate (NSC), Senior citizen savings scheme, and monthly income account scheme, respectively.
- The interest rates for the Public Provident Fund (PPF), Kisan Vikas Patra, and Sukanya Samriddhi Account scheme and some of the term deposits remain the same.
- In September 2022 also, Central government increased the interest rates of these small savings schemes by 10-30 basis points for the October-December quarter after keeping it unchanged for more than two years.
- Advantage of Hike: It will serve as protection against high inflation and interest rates.
- Objective: To balance the interests of senior citizens and persons saving in instruments without tax benefits.
- Checking the interest rate for small savings, as it essentially translates into a higher interest cost for the government when it borrows against the National Small Saving Fund.
Advantages of Savings Schemes
- Emergency Fund: It helps a person from unexpected personal and medical emergencies.
- Income Source: Savings schemes also work as an additional source of income.
- It give financial discipline to a person
- Long-term advantages: By investing in savings plans, people can attain their long-term objectives, such as retirement plans, children’s schooling, and children’s marriage.
- Customer Friendly: The majority of contributions paid to the programmes can be made online, and maintenance and investing are fairly straightforward.
- Security and safety: The contributions that are made towards the schemes are minimal on risk as well as safe and secure since the schemes are launched by the Indian Government.
- Tax Savings: Many saving schemes offer one or the other kind of tax benefits—may it be tax deductions, exemption, or both.
- Some schemes qualify for a tax deduction on investment of up to Rs.1.5 lakh under Section 80C of the Income Tax Act, while some, offer an exemption on the investment, interest accrued, and the maturity amount.
- Real rate of return: Since inflation and interest rates are high in the indian economy, real rate of return on their investments is minimal.
- Retail inflation rate in November is 5.88 per cent.
- Reserve Bank of India repo rate is at 6.25 per cent.
- RBI in its Monetary Policy Report released on September 30 had noted that with government bond yields increasing, the revised small savings rates were 44-77 basis points below the formula implied rates.
- Negative real returns: Senior citizen savings scheme is generating negative returns for someone in the highest tax bracket.
- Post tax return on most of the small savings instruments will not even cover inflation for those in the highest tax bracket.
National Small Savings Fund (NSSF)
- It is a fund body, which pools money from various small saving schemes.
- NSSF was established in 1999 within the Public Account of India.
- It is administered by the Ministry of Finance, Government of India, under the National Small Savings Fund (Custody and Investment) Rules, 2001, derived from Article 283(1) of the Constitution.
- Purpose of NSSF: It combines the collections obtained from different small saving schemes.
- The pool from all such schemes are credited to the NSSF and withdrawals under small saving schemes by depositors are made from this Fund.