1. 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.
2. 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 schemes is five 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.
3. What are the 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 enjoy an 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 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 6.8% 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.
- 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.1,500 up to Rs.4.5 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 6.6%. 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.9 lakh in the scheme. The investments and interest earned are not eligible for any tax deduction or exemption.
- Senior Citizens Savings Scheme (SCSS):SCSS is designed for senior citizens who want to park their retirement funds. Individuals aged between 55 years and 60 years with early retirement can also opt for the scheme within one month from the receipt of their retirement benefits. SCSS allows only one deposit. The minimum investment is Rs.1,000, and the maximum is Rs.15 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 7.4% per annum. 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.
- 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 113 months at an interest rate of 6.9%. Your money stands doubled at the end of the tenure of nine years and five months (113 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 a collateral to get loans from banks.
- 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 per annum. The present rate of interest is 7.6% 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 per annum, 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.
- 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 60 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. In the case of other eligible salaried employees, NPS serves similar to any other long-term pension schemes.
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. 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 under the EPFO guidelines. 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 2019-20 is 8.5% 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 Employee Provident Fund (EPF). An interest rate of 8.5% 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 and a life cover of Rs.30,000 that is payable on the death of the beneficiary. 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.
- Deposit Scheme for Retiring Government Employees:This saving scheme is limited to the retiring public sector employees. You must open an account with any bank or post office within three months from the receipt of your retirement benefits. The interest will be paid out on a half-yearly basis, on 30 June and 31 December. You can make withdrawals from the account after completing one year. You can make a maximum of one withdrawal in a calendar year and must be in multiples of Rs.1,000. An interest rate of 7% p.a. will be applicable from the date of deposit. The interest is eligible for tax exemption under section 10(15)(iv)(i).
4. Comparison table
|Scheme||Duration||Rate of Interest*||Amount Contributable||Taxability of the Returns|
|ELSS||3 years||Minimum: Rs.100 per annum Maximum: No limit||Long-term capital gains taxed at 10% + dividends from ELSS is taxed at 10%|
|FD||7 days to 10 years; as per your convenience||3.5% p.a.to 6.8% p.a.||Minimum: Rs.500 Maximum: No limit||Interest is taxed as per the income slab rates; TDS of 10% above Rs.40,000|
|PPF||15 years||7.1% p.a.||Minimum: Rs.500 per annum Maximum: Rs.1.5 lakh||Interest income is tax-exempt|
|NSC||5 years||6.8% p.a.||Minimum: Rs.100 per annum Maximum: No limit||Interest is taxed as per the slab rates|
|Post Office Monthly Income Scheme||5 years||6.6%||Minimum: Rs.1,500 per annum Maximum: Rs.4.5 lakh||Interest is taxed as per the slab rates|
|Senior Citizens Savings Scheme||5 years||7.4% p.a.||Minimum: Rs.1,000 Maximum: Rs.15 lakh||Interest is taxed as per the slab rates. Entitled to deduction up to Rs.50,000.|
|Kisan Vikas Patra||124 months (10 years and 4 months)||6.9% p.a.||Minimum: Rs.1,000 Maximum: No limit||Returns are fully taxable|
|SSY||Until the girl child turns 21 years or she gets married after 18 years of age Contribution Period: 15 years||7.6% p.a.||Minimum: Rs.250 per annum Maximum: Rs.1.5 lakh||Interest earned is tax-exempt|
|Atal Pension Yojana (APY):||20 years||N/A||Minimum Monthly Pension: Rs.1,000 Maximum Monthly Pension: Rs.5,000||Not taxable|
|NPS||Until the age of 60 years||5% p.a.to 8% p.a.||Minimum: Rs.1,000 per annum Maximum: No limit||Upon retirement, 60% of the corpus is tax-free. Annuity pension received on balance 40% is taxed at slab rates.|
|EPF||5 years||8.5% p.a.||12% of the basic salary||Not taxable after the completion of the lock-in period|
|VPF||5 years||8.5% p.a.||Anything above the 12% EPF contribution up to 100% of the basic salary||Not taxable after the completion of the lock-in period|
|Pradhan Mantri Jan Dhan Yojana||N/A||4%||No limit||Not taxable|
|Deposit Scheme for Retiring Government Employees||N/A||9% p.a.||Minimum: Rs.1,000 Maximum: Not exceeding total retirement benefits||Not taxable|