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Last Updated : Jul 17, 2019 02:10 PM IST | Source: Moneycontrol.com

Savings Plan: Govt Savings Scheme in India

The government offers various saving schemes to suit the different needs of investors. Check-out the various types of savings schemes in India along with their features and benefits.

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Any scheme that helps you save money or grow your wealth falls under the category of saving scheme. Think of it as a safe deposit box where you can keep aside a part of your income regularly and earn interest. The amount stashed away in this box could be used at a later date to pay for a mortgage, a child’s education, marriage or even a medical emergency.

There are various such schemes launched by the government of India and public sector financial institutions or banks. These schemes help you save for your retirement or take care of exigencies that could arise in the future. You can choose from a host of short-term and long-term investment schemes depending on your current needs or plans. While some schemes offer lucrative interest rates, others provide tax exemptions or deductions.

Unlike mutual funds, most of the saving schemes launched by the government and banks are low on risk and earn steady returns. For instance, if you want to set aside a part of your income for your daughter’s higher education, you can opt for a bank fixed deposit (FD) and earn interest.

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If the FD is a tax-saving one, you will also enjoy tax benefits as these five-year FDs entail a deduction of up to Rs1.5 lakh per annum from your taxable income according to Section 80 C of the Income Tax Act. There are also other savings schemes that enjoy the benefit of Section 80C, like the Sukanya Samriddhi  Yojana  (SSY) and Public Provident Fund (PPF). PPF is a long-term investment that will help you prepare for the future.

The Employee Provident Fund (EPF) is a government saving scheme that is mandatory for salaried persons. The government also offers special savings schemes for its own employees. These schemes ensure that a part of your income is saved and can be withdrawn if the need arises.

Similarly, there’s the Post Office Savings Scheme, which is risk-free and offers decent returns. You can choose the tenure of the investment and the interest earned on it is good protection against inflation.

 

Advantages of a Saving Scheme in India

The main advantage of a saving scheme is that it helps you stash away some part of your current income to meet future needs; the interest earned ensures that the value of the capital does not erode because of inflation. You must remember that inflation constantly nibbles away at your capital. If the inflation rate is 5 percent per annum, the real value of your capital erodes by that much each year!

Since many savings schemes are either launched or supported by the government, they are generally free from risk. If you want to invest your money but don’t want to be vulnerable to a fluctuating stock market, a government saving scheme is the right place to put your money.

Of course, there’s no denying that lower the risk, lower the returns. So if you want to grow your capital, you might want to invest more aggressively in riskier investments, like equity. If capital protection is your main aim, these saving schemes an ideal investment for you. Interest rates of these schemes are revised frequently, so you don’t need to worry about getting very low returns. So if you want to play it safe, an investment in a PPF or the National Pension Scheme (NPS) may be better than in equity funds.

Saving schemes play a critical role to meet goals that you have set for yourself and your family. For example, if you want to invest for your child’s education, you can invest in National Savings Certificates (NSS), which have a maturity of five years plus the income tax advantage of Section 80C. Or if you’re thinking about retirement, PPF or an NPS can be quite helpful. There’s a vast range of schemes on offer designed to cater to many needs. There’s SSY, which is aimed at providing financial independence to a girl child and the Atal Pension Yojana, which helps people from economically weaker sections of the society.

So there are schemes for everyone, irrespective of their economic status. The government offers savings schemes for the rich, the poor, the working class, government employees as well as senior citizens. For instance, there’s the Pradhan Mantri Jan Dhan Yojana, which is for people who do not have a bank account. Apart from interest on deposits, account holders will also be eligible for accident insurance of Rs 1 lakh or life cover of Rs 30,000.

Another benefit of these schemes is that they are flexible, meaning most schemes allow accounts to be transferred. For example, the Post Office Savings Scheme allows you to transfer your account from one post office to another in case you relocate. If you are still looking for reasons to invest in a savings scheme, regular savings also help rein in your expenses.

 

Saving Schemes List: Types, Interest Rates & Tenures

The government of India offers several savings schemes to suit the varied needs of investors. If you are wondering about which scheme to invest in, you will have to look at the interest offered by each schemes, eligibility as well as the tenure.

Each scheme has a different rate of interest. While some are changed at periodic intervals, those on others remain fixed for the entire tenure of the investment, assuring you fixed returns. PPF is a long-term investment for 15 years and the rate of interest changes quarterly. The NSC has a five-year tenure, and the interest remains unchanged during that period.

There are a host of short and long-term savings schemes offered at post offices. You can open a savings account, or choose a recurring deposit account. You can also invest in the Kisan Vikas Patra Scheme, which gives you an interest rate of 7.7 percent.

Pension funds, too, are effective saving schemes in the country and can help prepare for retirement. You can invest in the NPS or the Atal Pension Yojana. Senior citizens, too, can invest in the short-term savings scheme on offer for them.

Here’s a quick view of the various government schemes along with their interest rates and tenures:
SrNameInterest ratesTenures
1National Savings Certificate8 percent (Jan-Mar 2019)5 or 10 years
2Public Provident Fund8 percent (applicable from April 1, 2018)Min 15 years
3Voluntary Provident Fund8.65 percentMin 5 years
4National Pension SchemeDepends on performance of investmentMatures at the age of 60
5Post Office Savings Account4 percentNone
6Post Office Time DepositVaries as per tenure1 to 5 years
7Post Office Recurring Deposit account7.3 percent5 years
8Post Office Monthly Income Scheme7.7 percentFive years
9Atal Pension Yojana8 percentDepends on age
10SukanyaSamriddhiYojana8.5 percent21 years or marriage of a girl
11KisanVikas Patra7.7 percent118 months
12Senior Citizens Savings Scheme8.7 percentFive years

Types of Savings Scheme in India

Savings schemes in India are broadly divided into two types—a National Savings Certificate (NSC) and a National Savings Scheme (NSS). Both are government-backed and are tailor-made to suit your specific needs.

For example, you can purchase an NSC from any post-office near you or buy it for your child. It has a maturity period of five years, and while returns may not be very high, it is a safe scheme and gives tax benefits to the investor.

On the other hand, schemes under the NSS are more flexible as they let you extend your terms of investment. However, they also offer assured returns. Meaning, if you invest in an NSS today for ten years at an interest rate of 8 percent, at the time of maturity, you will get returns based on the same interest rate irrespective of the market conditions. These schemes also offer tax deductions.

Apart from these two categories, there are several other savings schemes in India that are meant for a special segment of the population. For example, the SSY scheme encourages you to save for your daughter’s education or marriage.

Both public and private sector banks offer tax-saving fixed deposits. Each bank has a different rate of interest for these schemes, which also require investment for a minimum period of five years. These schemes, as their name suggests, offer a deduction up to Rs 1.5 lakh per annum from taxable income under Section 80C.

Also, there are a few integrated life insurance schemes that are also attractive investment options. These are called Unit-linked Insurance Plans (ULIPs). For example, investment in such a plan will not only provide you with insurance cover but also give you investment benefits. In the case of ULIPs, the insurer invests a part of your premium in bonds or shares.

The best type of savings schemes for you will depend on various factors such as the amount you want to invest, the period for which you want to invest, the purpose for investment (tax benefit/ returns) and the returns you expect.

National Savings Certificate

The National Savings Certificate (NSC) is a savings instrument issued by the Government of India for low and mid-income investors. If you have a steady income and are looking for a safe scheme to invest in, this is the savings scheme for you.

An NSC can be purchased from the nearest post office. You can invest for yourself, on behalf of your child or hold a joint account with another person. While currently an interest of 8 percent is compounded annually, the interest rates are revised quarterly. Although NSC does promise guaranteed returns, it does not yield as high returns as the NPS, whose returns may be higher since some of the investments can be made in stocks.

On the plus side, the NSC scheme allows feasibility. That means you can start with a smaller amount and increase your deposits when you deem fit. The tenure is also not too long. The maturity period of an NSC is five years.

One of the biggest advantages of the NSC is the tax benefit you will get. Investments up to Rs 1.5 lakh a year is deductible from taxable income under Section 80C of the IT Act. NSC can also be used as collateral for loans from banks and non-banking financial companies (NBFC). On the downside, you cannot withdraw your deposits before the maturity of your tenure.

Similar to the PPF, this scheme was launched by the government of India as a safe savings scheme for investors with an appetite for low risk. The government has also made it available to individuals only, which means Hindu Undivided Families (HUFs) cannot invest in this scheme. Non-resident Indians (NRIs) too cannot invest in it.

 

Post Office Savings Schemes

Post offices in India offer a variety of savings schemes like banks and other NBFCs in the country. Like NSC, savings schemes available at post offices are meant for people who don’t want to take risks with their money. You can open a savings account, a recurring deposit or a fixed deposit at the post office. Depending on the amount invested, you can enjoy banking facilities such as cheque books, ATM and interest on your deposit.

You can choose to open a savings account at a post office and enjoy a return at the rate of 4 percent per annum. These accounts are similar to a savings account in banks and hence, offer similar services. You open an account in your name or hold a joint account with another. You can also open an account on behalf of a minor. Accounts can be opened with a minimum deposit of Rs 50.

Another option is to open a five-year recurring deposit. This deposit has a tenure of five years, during which time you will have to make monthly deposits. You get an interest of 7.3 percent per annum on a recurring deposit. This interest fixed from time to time and is compounded quarterly.

The post office time deposit or FD is also an investment for a fixed period but is more flexible. You can choose tenures of one, two, three and five years. A five-year deposit is eligible for a tax deduction as well. An investment in this scheme invites an interest of 7 percent per annum, except the fifth year when the rate of interest is 7.8 percent. The interest is calculated quarterly and paid annually. You can invest in this scheme with a minimum of Rs 200.

Apart from these three, the post office offers one more smart investment scheme—the Post Office Monthly Income Scheme. With a fixed maturity term of five years, the scheme offers an interest rate of 7.3 percent annum. The government reviews and changes the rate of interest every quarter. The interest you earn is paid out each month either as auto credit into a savings account at the same post office or through post-dated cheques. At the end of the five years, you will once again receive the principal amount. You can start with a minimum investment of Rs 1,500.

 

National Pension Scheme

The National Pension Scheme was initially launched by the Pension Fund Regulatory and Development Authority (PFRDA) for government employees. It is, however, now made available to all Indians, including NRIs voluntarily. The NPS is a long-term investment plan for anyone who doesn’t want to take too much risk and plan early for their retirement days.

According to the NPS scheme, you can open a pension account and invest in the scheme by making deposits at regular intervals. After your retirement, you can withdraw a certain part of your deposit. The rest will be given to you as a monthly pension. The NPS is considered one of the safest and sought-after schemes by people working in both the public and private sectors.

The NPS is not safe from market risks as a part of your contribution is invested as equity, corporate debt, government securities or other investment funds. Up to 50 percent of your contribution can be invested as such. The NPS gives the investor to opt for Active Choice where s/he can design their own portfolio and choose where their money is invested. The investor may also opt for Auto Choice, where the portfolio is designed automatically. Generally, an NPS account yields interests at 8 to 10 percent annual interest. To ensure that the investor is safe, there is an upper limit on the conversion of equities. Currently, there are eight NPS fund managers—HDFC Pension Fund, Birla Sun Life Pension Scheme, ICICI Prudential Pension Fund, LIC Pension Fund, SBI Pension Fund, Kotak Pension Fund, Reliance Capital Pension Fund and UTI Retirements Solutions. These managers manage the entire NPS corpus. You can track the performance of these managers every year, and if not satisfied with the returns, you can change your fund manager.

One of the greatest advantages of an NPS account is the tax benefit it attracts. The scheme could yield tax deductions up to Rs 2 lakh. There is a deduction of up to Rs1.5 lakh under section 80 C of the IT Act. Section 80CCD (1) covers contribution made by the investor and 80CCD (2) covers the contribution of the employer. An additional contribution of up to Rs50,000 can be claimed as an NPS tax benefit.

There are two kinds of accounts in the NPS—tier I and tier II. While the Tier I account is the default account, Tier II is a voluntary account. Tier I is the default account that is created for anyone who opts for an NPS scheme. A minimum of Rs 500 or Rs 1,000 has to be deposited to create this account which offers tax benefits. A voluntary Tier II account can be opened with Rs250 only. There is no tax benefit for the Tier II account.

 

Public Provident Fund

PPF is a low-risk fixed income savings scheme launched by the National Savings Institute under the Finance ministry. You can open a PPF account at your nearest post office or a nationalized bank. Some private banks offer PPF facility, too.

To open a PPF account, you can make a minimum annual contribution of Rs 500. You can choose to make monthly or annual contributions. The principal, as well as the interest in the PPF account, is guaranteed by the government, meaning that upon maturity of your scheme, you will get in return what you invested as well as the interest rate at which you invested.

The rate of interest of PPF changes every quarter as decided by the central government. Usually, interest rates for PPFs are higher than that for FDs in banks. Currently, for the period of January 1, 2019, to March 31, 2019, the rate of interest is 8 percent.

The tenure for a PPF is fixed at 15 years and can be extended by five years at a time upon maturity. You can open a PPF account only if you are a citizen of India. While NRIs are not allowed to create a PPF account, a person, who has an operating PPF account from before the time s/he became an NRI, is allowed to operate the PPF account.

Apart from being a safe saving scheme, a PPF account has two major advantages. A PPF contribution of up to Rs 1.5 lakh per annum is exempt from tax deductions as per IT Act. The account can also act as collateral for a loan from a bank. Upon maturity of the account, you can extend the tenure of the investment by five years.

You cannot close the account prematurely. In both cases, penalty will apply.

 

Sukanya Samriddhi Yojana (SSY)

The Sukanya Samriddhi Yojana (SSY) was launched by Prime Minister Narendra Modi as part of the Beti Bachao, Beti Padhao Yojana. Under the purview of the National Savings Institute, this scheme is aimed specifically at addressing the needs of a girl child and her parents, i.e. corpus for education and marriage.

Under the SSY, parents of girls aged below ten years can open a Sukanya Samriddhi Account. They can contribute to the account and save money for the education or marriage of the girl child. Parents can open up to two such accounts, in case they have more than one daughter. The account will mature after 21 years or when the girl marries after attaining 18 years.

 

Atal Pension Yojana

The Atal Pension Yojana was launched in the union budget in 2015. The scheme is tailor-made for those working in the unorganised sector and do not have pension benefits. It is like the National Pension Scheme for those with low income and working in unorganised sectors.

The scheme is ideal for people working as domestic help, construction workers or tailors, among others. Those working in the private sector and not having a pension benefit, too, may benefit from the scheme. The erstwhile Swavalamban Yojana has now been merged into the Atal Pension Yojana, and existing subscribers of the former have been transferred to the latter.

To open an account under the Atal Pension Yojana, one must have a valid bank account linked to their Aadhaar Card. Beneficiaries between the age group of 18 and 40 years can apply. An account can be created at any nationalised bank upon filling the form offline or online. The amount you invest in the scheme will determine the pension you will receive upon retirement. You can choose for a fixed monthly income of Rs 1,000, Rs 2,000, Rs 3,000, Rs 4,000 or Rs 5,000 after you are 60 years old.

Monthly contributions have to be made for a minimum of 20 years to be able to receive a pension upon retirement. The amount will be debited from your bank account directly. The scheme allows you to increase your premium if you wish to do so. In case you default on the premium, a penalty of Re1 for every Rs100 will be levied on your account. While currently, the rate of interest is 8 percent, it changes every quarter.

For the early birds, who had joined the scheme between June and December 2015, are eligible for a co-contribution from the government. For these investors, the government will make a contribution of 50 percent of the total contribution or Rs 1,000, whichever is lower. This co-contribution will be made by the government from 2015-16 through 2019-20.

 

Kisan Vikas Patra

Kisan Vikas Patra is one of the oldest and most successful savings schemes meant for farmers. It was launched in 1988 as a small saving certificate but was discontinued in 2011 as it was being used for money laundering purposes. In 2014, the Narendra Modi government amended the scheme and launched it again. The scheme says that the amount invested is doubled upon maturity of the scheme.

As per the new scheme, the tenure is 118 months, and the minimum deposit amount is Rs 1,000. Unlike other schemes, there is no upper limit on investment. For instance, if you buy a Kisan Vikas Patra certificate worth Rs 1,000 today, you will receive Rs 2,000 at the end of 118 months.

While initially this scheme was meant as a saving option for farmers, it is now open to all. The maturity amount will accrue an interest of 7.7 percent per annum compounded annually. It means if you don’t withdraw money and continue with the scheme, you will get interest. The rate of interest is set and reviewed by the government quarterly. You can buy a certificate with as little as Rs100 from a post office or a nationalised bank.

In a bid to curb money laundering, the government has made it compulsory to submit a copy of PAN card for any investments above Rs50,000. Except for NRIs, any individual above the age of 18 years or trust can buy a Kisan Vikas Certificate.

On the downside, there is no tax benefit to be gained from this scheme. However, an upside to this disadvantage is that the scheme can be held as collateral for a bank loan.

 

Voluntary Provident Fund

The Voluntary Provident Fund is an extension of the Employee’s Provident Fund (EPF) and is specifically meant for salaried employees. It is a voluntary contribution that you make towards your provident fund account. It is a tax saving scheme that helps you save up for your future.

While the EPF account requires the investor to save 12 percent of her/ his basic salary and dearness allowance, under the VPF, you can choose to increase this contribution up to 100 percent.

Investment in this scheme invites an interest at the rate of 8.65 percent per annum. You can invest for a minimum of five years and the government reviews and changes the rate of interest at the start of every year. All you have to do is ask your HR or accounting team to raise a request for addition of a VPF contribution. The VPF account will be attached to your existing EPF account. When you change your job, both the EPF and the VPFaccounts can be transferred to your new job.

The tax saving aspect of this scheme is the biggest attraction for investors. Contributions of up to Rs 1.5 lakh per annum as well as the interest accrued are exempt from tax under section 80(C) of the IT Act. It is a safe scheme that also promises high returns, given the higher rate of interest.

The returns are higher than that of PPF, which promises an interest of 8 percent. The VPF on the other hand accrues an interest similar to the EPF, though the tax benefits are the same as that of the PPF. The VPF is quite similar to the EPF and has the same lock-in period. The account has to be at least five years old for you to be able to withdraw the entire amount. No tax will be applied on the withdrawal in that case.

 

FAQs

What are savings schemes?

Any scheme that helps you save money for the future is a savings schemes. These schemes help you plan and achieve your financial goals and also help take care of immediate needs. There are several schemes offered by the government, banks and NBFCs that help you save money as well as get tax benefits.

What is PPF?

Public Provident Fund is a long-term investment programme launched by the National Savings Institute. It is an investment scheme where investor makes deposits for at least 15 years. Returns are guaranteed upon maturity and the rate of interest is reviewed and changed by the government every quarter. It is considered to a relatively safe scheme. PPF contributions up to Rs1.5 lakh are exempt from tax under section 80(C) of the IT Act.

What is the interest on NPS?

The National Pension Scheme is a savings scheme launched by the Pension Fund Regulatory and Development Authority (PFRDA). The NPS is a long-term retirement plan for those with low-risk appetite. The NPS is a pension account where you can make deposits at regular intervals. After your retirement, you can withdraw a certain part of your deposit. The rest will be given to you as monthly pension. Generally, an NPS account yields returns at 8 to 10 percent annual interest.

What is the difference between PPF, NSC and NPS?

The National Savings Certificate is a savings bond that is tax efficient for the beneficiary. It may not yield very high results, but guarantees safe returns.

The PPF, on the other hand, is a long-term investment (at least 15 years) that is both tax efficient and guarantees high returns. The rate of interest is changed every quarter by the government. A PPF investment helps achieve long-term financial goals and even take care of post-retirement days.

An NPS, on the other, hand is an investment in to your retirement days. You invest regularly into the scheme and accrue interest. Upon maturity (when you attain 60 years) you can withdraw a part of your investment and the rest is given to you as monthly pension.

Is PPF better than NPS?

The features of PPF and NPS are almost same. Both require systematic and regular investment for long periods. While PPF is to be maintained for a minimum of 15 years, the NPS is to be maintained till you attain 60 years of age.

However, both have different advantages. A PPF helps you attain your long-term financial goals such as buying a house, a car or paying for your child’s marriage. An NPS, on the other hand, acts as a retirement plan. Upon attaining 60 years, you will earn a monthly pension.

Therefore, whether PPF is better than NPS depends on your requirement.

Which is the best saving scheme in India?

There are various savings schemes available in India. What is best for you depends on your requirement, your financial goals, your risk appetite and your expected returns. Having said that, here’s a list of the most popular schemes:

- Post office savings scheme

- PPF

- NPS

- NSC

- Mutual funds

- Unit linked investment plans

What is Sukanya Samriddhi Scheme?

The Narendra Modi-led government of India has rolled out a special savings scheme for parents of girls. The scheme is a part of the BetiBachao, BetiPadhaoYojana. The scheme allows parents with a girl child below 10 years of age to open a savings account. Parents can regularly deposit money into the account and accrue interest on the deposits. The money can be withdrawn after 21 years or at the time of marriage of the girl after she is 18 years old. The scheme helps parents save for their girl’s education or marriage.

Are savings schemes tax-free?

Not all savings schemes offer tax exemptions. However, most do. Fixed deposits, which are tax saving in nature, will invite a tax deduction. Both NSC and PPF offer tax exemptions for contributions up to Rs 1.5 lakh a year. The NPS, too, is exempt for contributions up to Rs1.5 lakh a year. Other pension schemes such as the Atal Pension Yojana, however, are not tax-exempt. Read the salient features of each savings schemes before investing in it.

How is interest calculated on NSC, NPS and PPF?

An NSC account and a PPF account will attract an annual interest of 8 percent. The rate is changed by the government every quarter. The rate of interest of the NPS depends on the performance of your investment. It is usually between 8 to 10 percent.

Which is the best saving scheme for me?

The best saving scheme will depend on your requirement, your financial goals, the amount of investment you want to make, the tenure you are willing to commit to as well as the returns you expect from the scheme. Each saving scheme serves various purposes such as savings, interest, returns as well as tax benefits. Hence, the best saving scheme for you will be based on your judgement on these indicators.
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First Published on Jul 17, 2019 02:10 pm
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