Saving Schemes: Types, Interest Rates & Comparisons

Update:
From April 2023, the government has made Aadhaar and PAN numbers mandatory for investing in post office savings schemes and updating of Aadhaar in existing post office savings schemes within 30 September 2023.

Managing finances becomes a hassle as several people do not know how to handle money. Most individuals would not have enough money to lead a comfortable life. The Government of India has considered all these and launched various saving schemes. These schemes help individuals save a part of their income for future use. Some schemes contribute from the government to the individuals to make their lives easier.

What are saving schemes?

Saving schemes are instruments that help individuals achieve their financial goals over a particular period. These schemes are launched by the Government of India, public/private sector banks, and financial institutions. The government or banks decide the interest rate for these schemes and are periodically updated. You can use the savings you make through these schemes for emergencies, retirement, higher education, children’s education, marriage, at the time of job loss, to reduce debts and more.

List of savings scheme in India and their features 

Different types of saving schemes available in India

There are a number of options available when you are looking for saving schemes in India. Many are backed by the Government of India, while RBI and SEBI regulate the others. Alongside, a number of these schemes provide some kind of income tax exemptions/deductions. Here is a list of such saving schemes:

Equity-Linked Savings Scheme (ELSS) 

ELSS, also known as tax saving funds, are a form of mutual funds. ELSS investments get tax deductions up to Rs.1.5 lakh under Section 80C. The investment has a compulsory lock-in period of three years. The returns on the redemption of the investments are taxable as capital gains. The gains are eligible for exemption of up to Rs.1 lakh. Beyond this amount, they are taxable at 10%.

ELSS savings have exposure to the equity market with underlying investments in a mix of debt and equity. The equity component offers higher returns and debt provides a cushion against volatility. The scheme offers higher returns over the long term, above five years. A SIP (systematic investment) provides stability of investment and fetches higher returns. The minimum investment starts at Rs.500.

Fixed Deposits (FD) 

Fixed Deposit (FD) accounts are considered to be hassle-free and the safest investment option in the market. You deposit any amount that is convenient for you, for a specified period that earns interest as per the rate prevailing on the date of deposit. The scheme offers flexibility in terms of tenure and the frequency of interest payout. The interest offered on an FD account is much higher than the one offered on a bank savings account.

If you need the money before the maturity date, you can choose to break the FD or even take an overdraft loan on the FD. You also have the option to reinvest the interest to earn a higher lump sum at the end of the tenure. The interest is taxable and can be subject to TDS for payments exceeding Rs.40,000.

Public Provident Funds (PPF) 

PPF is a government-backed long-term tax-free savings scheme. The money deposited with your PPF account will get tax deduction under Section 80C of the Income Tax Act. The interest earned from such savings is also tax-exempt. You can open a PPF account at the nearest bank or post office. The money will be locked in for 15 years and can be extended in blocks of five years after the completion of the lock-in period. Returns will be calculated based on compound interest at the rate of 7.1% p.a. A minimum annual investment of Rs.500 can be made. You can invest up to Rs.1.5 lakh per annum.

National Savings Certificate (NSC) 

National Savings Certificate, another government-backed saving scheme, provides guaranteed returns along with a tax saving option. You can invest in an NSC at the nearest post office. The lock-in period for the scheme is five years. The government reviews the interest rate of the scheme once every quarter and takes a call on it.

However, the interest rate will not change during the tenure after you purchase the certificate. Tax deductions can be claimed on the investment up to Rs.1.5 lakh under Section 80C. Currently, the interest rate of 7.7% p.a. is applicable. The interest will be annually compounded and paid only on maturity. Upon maturity, the interest accrued is taxable and must be added to the total annual income. The interest reinvested and compounded is eligible for tax deduction under Section 80C.

NSC may be pledged or transferred as security to the government, companies, banks, housing finance companies, etc., by submitting the prescribed application form at the concerned Post Office, supported by an acceptance letter from the pledgee.

Post Office Monthly Income Scheme 

Post Office Monthly Income Scheme is similar to a regular savings bank account. Individual account holders can invest from a minimum of Rs.1,000 up to Rs.9 lakh in the scheme. The account holder will be able to get a fixed monthly income in the form of interest credited to the savings account with the same post office. The current interest rate is 7.4% p.a. The scheme is open only for resident Indian citizens. In case of joint account holders, two or three individuals can invest jointly up to a maximum Rs.15 lakh in the scheme. The investments and interest earned are not eligible for any tax deduction or exemption.

The deposits must be kept for 5 years. Premature withdrawal is subject to closing charges. No deposit shall be withdrawn before the expiry of 1 year from the date of deposit. If the account is closed after 1 year and before 3 years from the date of account opening, a deduction of  2% from the principal will be deducted, and the remaining amount will be paid. If the account is closed after 3 years and before 5 years from the date of account opening, a deduction of 1% from the principal will be deducted, and the remaining amount will be paid.

Senior Citizens Savings Scheme (SCSS) 

SCSS is designed for senior citizens who want to park their retirement funds. Individuals aged above 60 years (in some cases 55 years) can also opt for the scheme. SCSS allows only one deposit. The minimum investment is Rs.1,000, and the maximum is Rs.30 lakh.

The tenure of the scheme is five years and can be optionally extended for another three years. It comes with an interest rate of 8.2% p.a. The interest is credited quarterly in a savings account maintained with the same post office. The investment in SCSS qualifies for deduction under Section 80C up to a maximum of Rs.1.5 lakh. The interest earned annually is taxable. But, the senior citizens can claim a deduction of up to Rs.50,000 under Section 80TTB.

The deposits must be kept for 5 years. Premature withdrawal is subject to closing charges. If the account closes before 1 year, no interest will be payable and if any interest paid in the account shall be recovered from the principal. If the account closes after 1 year but before 2 years from the date of opening, an amount of 1.5 % will be deducted from the principal amount. If the account closes after 2 years but before 5 years from the date of opening, an amount of 1 % will be deducted from the principal amount.

Kisan Vikas Patra (KVP) 

You can invest in Kisan Vikas Patra, a fixed-rate small savings scheme, by approaching your nearest post office. The investment has a tenure of 9 years and 5 months (115 months) at an interest rate of 7.5% p.a. Your money stands doubled at the end of the tenure of 115 months. The scheme encourages long-term investments and suits risk-averse investors who have excess money.

The minimum investment is Rs.1,000 with no upper limit on investments. KVP offers guaranteed returns and comes with a premature encashment option after completing two and a half years. There is a possibility of changes in the maturity period based on interest rate variation. However, the maturity value will be printed on your certificate. The investment and interest earned are not eligible for a tax deduction or an exemption. You can use the certificate as collateral to get loans from banks.

KVP may be pledged or transferred as security to the government, companies, banks, housing finance companies, etc, by submitting a prescribed application form at the concerned Post Office supported with an acceptance letter from the pledgee.

Sukanya Samruddhi Yojana (SSY) 

The SSY scheme was launched by the Prime Minister Narendra Modi aiming at securing a girl child’s future. This government-backed scheme can be opened by the parents of a girl child aged below 10 years. Parents are required to contribute for 15 years. Individuals can get a tax deduction of up to Rs.1.5 lakh per year under Section 80C. A maximum of two such accounts can be opened per household, one for each girl child.

In the case of more than two girl children in a household, the rest of the girl children cannot avail the benefits of the account. Individuals can invest a minimum of Rs.250 and up to a maximum of Rs.1.5 lakh p.a. The present rate of interest is 8.2% p.a. The tenure of the account is 21 years from the date of opening or until the girl child gets married after the age of 18 years. The scheme allows for a partial withdrawal of up to 50% of the balance after attaining 18 years, for meeting expenses of higher education.

Atal Pension Yojana (APY) 

The APY scheme is named after the former Prime Minister of India, Mr Atal Bihari Vajpayee. It mainly targets the welfare of the weaker section of the society, especially those from the unorganised sectors and includes a very low premium. Individuals within the age group of 18-40 years are eligible to apply for the scheme.

The premium must be paid for a minimum of 20 years. Unlike other schemes, you have to target a monthly pension you want to receive to figure out the monthly contribution you need to make. The contribution also depends on the age at which you are starting the contribution. The monthly minimum pension you can get is Rs.1,000, and the maximum is Rs.5,000, upon attaining the age of 60.

The government will make a co-contribution of 50% of your annual contribution or Rs.1,000 p.a., whichever is lower. Such co-contribution will be made for five years if you have subscribed for the scheme between 1 June 2015 and 31 December 2015 to get this benefit. You will be eligible for a government contribution if you do not have any other statutory saving schemes and if you are not an income taxpayer.

Tax exemption is available on contributions made by individuals towards Atal Pension Yojana under Section 80CCD of the Income Tax Act, 1961. Under Section 80CCD (1), the maximum exemption allowed is 10% of the concerned individual’s gross total income up to a limit of Rs. 1,50,000. An additional exemption of Rs. 50,000 for contributions to the Atal Pension Yojana Scheme is allowed under Section 80CCD(1B).

National Pension System (NPS) 

National Pension System is an initiative by the Central Government and makes a reliable source of income after retirement. The scheme is open for state and central government employees and private employees in organised and unorganised sectors. The scheme is for Indian citizens in the age group of 18 years to 70 years. The amount of contribution is made from the employee’s monthly salary, and an equal amount will be contributed by the employers (including government employees).

The contribution is 14% in the case of government employees, and 10% in case of any other employees. The employer’s and employee’s contribution is eligible for tax deduction under Section 80C up to a limit of Rs.1.5 lakh. Individuals can make a self contribution and claim an additional deduction of Rs.50,000. For non-salaried individuals the minimum contribution is Rs.500 or Rs.1,000 per month. Upon retirement, the account holders can withdraw up to 60% of the corpus tax-free. The balance 40% is used to buy an annuity plan to receive a monthly pension after retirement.

Calculate monthly Pension & Tax Benefits through Cleartax NPS Calculator.

Employees Provident Fund (EPF) 

Employee Provident Fund (EPF) is a savings scheme operated by the EPFO under the EPF Act. An employer and employee covered under EPF have to mandatorily contribute to a Provident Fund (PF) account in the name of the employee. EPF offers long-term retirement planning for the working class. The account is transferable from one employer to another.

The account can be maintained until retirement. The employer and employee contribute 12% of the monthly salary into the provident fund account. The account if eligible for interest on the accumulated balances. The interest rate for FY 2023-24 is 8.25% p.a. The account also offers financial security for the account holders in case of emergencies. The employees’ contribution is eligible for deduction under Section 80C.

Voluntary Provident Fund (VPF) 

Salaried individuals can opt for an additional contribution of up to 100% of their basic salary and dearness allowance over and above the 12% contribution done to the EPF towards VPF. An interest rate of 8.15% can be accrued on the accumulated funds. You must know that the employer will not make any contribution when you opt for VPF.

Pradhan Mantri Jan Dhan Yojana 

Pradhan Mantri Jan Dhan Yojana is a savings scheme that is tailor-made for citizens who are below the poverty line. The account holders can make use of the scheme for reinvestments. The scheme is convenient for this class of people as they do not have to maintain a minimum balance in their accounts.

They will receive additional accidental insurance cover of Rs.1 lakh that is payable on the death of the beneficiary, life insurance cover of Rs.30,000. The government has made this scheme more user-friendly with the mobile banking facility. In addition to the other benefits, account holders can also avail interest on their deposits. The account holders will also be eligible for an overdraft facility of up to Rs.5,000 applicable to one account per household, preferably lady of the household.

Post Office Savings Account 

Post Office Savings Account The domestic customer can open the account in single or joint ownership. An interest rate of 4% p.a. is applicable on the deposits in the post office account. you can avail of a cheque book, ATM card, e-banking and mobile banking services, and other services with the account on request. Interest is credited at the end of each financial year. Individuals can avail of up to Rs 10,000 deduction against interest income from a savings bank account under Section 80TTA of the Income Tax Act, and senior citizens can avail up to Rs. 50,000 under Section 80TTB against interest income from a savings bank account, time deposits, recurring deposits. If no deposit/withdrawal takes place in an account during the continuous three financial years, then the account shall be treated as silent/dormant. Revival of such an account can be done by submitting an application along with fresh KYC documents and a passbook at the concerned Post Office.

National Savings Recurring Deposit Account (RD)

As the name suggests, the tenure of this RD account is fixed for five years. You can agree to a fixed monthly deposit payment starting from Rs 100 and earn interest at 6.7% p.a. The interest is compounded quarterly. You can get a loan of up to 50% against the deposit available in the account after completing 12 instalments without defaulting. The account can be extended for a further 5 years by giving an application at the concerned Post Office. The interest rate applicable during the extension will be the interest rate at which the account was originally opened. RD Account can be closed prematurely after 3 years from the date of account opening by submitting the prescribed application form at the concerned Post Office. PO Savings Account interest rate will be applicable if the account is closed prematurely, even one day before maturity.

National Savings Time Deposit Account (TD)

You can choose from four possible tenures for post office time deposit accounts: 1 year, 2 years, 3 years, and 5 years. The minimum deposit allowed in this account is Rs 1,000. The interest is calculated quarterly but payable annually. 

The interest rates for FY 2024-25 i.e. from 1 April 2024 to 30 June 2024 are as follows:

The investment in the account with five-year maturity will qualify for a Section 80C deduction. The Post Office TD account can also be pledged as a security to scheduled or cooperative banks, RBI, the housing finance company, government companies, and others by submitting a prescribed application form at the concerned Post Office supported with an acceptance letter from the pledgee. Deposits cannot be withdrawn before the expiry of six months from the date of deposit. TD accounts can be closed prematurely by submitting a prescribed application form with the passbook to the concerned post office.

 If the TD account closes after 6 months but before 1 year, the PO Savings Account Interest rate will apply.

Mahila Samman Savings Certificate

The Mahila Samman Saving Certificate, 2023, is available from 01/04/2023 in the Post Offices at an interest rate of 7.5% p.a.  The Mahila Samman Savings Certificate can be done only in the name of a girl child or woman. A woman or the guardian of a minor girl child can open a Mahila Samman Saving Certificate scheme. The minimum deposit amount under the Mahila Samman Savings Certificate is Rs.1,000 in multiples of rupees one hundred. The maximum deposit amount is Rs.2 lakh in one account or all Mahila Samman Savings Certificate accounts held by an account holder. A woman or guardian of a girl child can open a second Mahila Samman Savings Certificate account after a minimum gap of three months from the opening of the existing account. The maturity period of the Mahila Samman Savings Certificate account is two years. Thus, the maturity amount will be paid to the account holder after two years from the account opening date. 

Why is it important to invest in saving schemes?

Saving schemes are important for individuals of a country and, in turn, for an economy because of the following reasons:

• Safety: Depositing your hard-earned excess money in saving schemes will help secure it for your future needs. Holding on to liquid money may not be safe.
• Retirement Funds: Periodically, depositing money in long-term saving schemes can help you build a retirement corpus. When you start saving from a young age, it will reward you with a huge corpus that can be used after your retirement and let you lead a comfortable life.
• Long-Term Benefits: Since most of the schemes make use of compound interest concept for interest calculation, long-term investment can fetch you unbelievable returns. The minimum lock-in period of these range between one to fifteen years, and the maximum can go until you reach the age of 60 years. The compounding of returns, coupled with long-term savings, will earn you interest on interest and end up as a huge amount on maturity.
• 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. Another set of schemes offer an exemption on the investment, interest accrued, and the maturity amount.
• Avoid Unwanted Expenses: When you have all the money at hand, you may end up spending it on unwanted items. On the other hand, investing the surplus that remains after meeting the necessary expenses in a suitable saving scheme will help avoid expenditure on unnecessary goods and services.

These saving schemes cater to a wide variety of investors. Most of them are government supported thus there is guarantee of returns at attractive rates. However, interest rates, tax treatment and lock-in period are different for different schemes. Thus, investors should go through the schemes and select the most suitable option for them as per their goals. Individuals may also invest across a combination of best savings schemes for optimal growth of wealth.