Benefits Of Post Office Small Savings Schemes - Higher Returns, Tax Benefits

Post office schemes are government-backed instruments, and therefore, risk-free and secured

Opening a bank fixed deposit (FD) is among the simplest form of investment that one can undertake to start one’s investing journey. However, in case you are not comfortable with investing an initial corpus in a fixed deposit, you can start with a recurring deposit. This involves depositing a fixed amount in instalment over a fixed tenure, and fetches returns as good as that on a fixed deposit.

Recently, after the Reserve Bank of India (RBI) increased its repo rate successively over three months, several banks increased their deposit and lending rates. At present, the State Bank of India, HDFC Bank, Axis Bank are offering term or fixed deposits at 5.65 per cent, 6.10 per cent and 6.05 per cent, respectively across various deposit tenures.

That said, these rates do not come anywhere close to the returns on post office small savings schemes.

The impressive return on these post office schemes is the primary reason why many investors choose these over traditional bank deposits for their debt investments. Another added advantage these post office scheme offer is that of tax exemption. Additionally, there is a sense of security too, as these are ‘government-backed’ schemes. 

So, here is a brief on post office small savings schemes and how you can invest in them.

What Are Post Office Small Savings Schemes?

The post office offers a plethora of deposit schemes, particularly for those who wish to invest for their debt investments. The other name for post office deposits is ‘small savings schemes’. The reason why it is named so is because post office small savings schemes allows citizens to invest for as little as Rs. 500, as per the tenure chosen. 

So, such schemes are ideal for two kinds of investors – those who have little risk appetite, and those who are just beginning their investing journey. That said, these investments are beneficial for all kinds of investors.

Says Kartik Parekh, a Securities and Exchange Board of India (Sebi)-registered investment advisor and co-founder of fintech-platform, Gonachakya: “Post office small schemes are beneficial to all, depending on their liquidity requirements. These schemes mostly have a lock-in period of five years. So, if you can wait that long and don’t require the capital within that tenure, such schemes are a good investment.” 

Examples Of Post Office Small Savings Schemes 

In addition to higher interest rates, post office schemes also come with tax benefits under Section 80C of the Income-tax Act, 1961. This section allows investors to reduce their taxable income by investing in eligible tax-saving instruments, or for incurring certain expenses. 

Some of these post office schemes and their interest rates are as follows: 

  • Post Office Time Deposit - 5 years (6.7 per cent) 
  • Public Provident Fund (7.1 per cent) 
  • National Savings Certificate (6.8 per cent) 
  • Senior Citizen Savings Scheme (7.4 per cent) 

The tenure for these schemes lie between five and 21 years. 

Adds Parekh: “With post office small savings schemes, you get tax exemption on deposits under Section 80C of the Income-tax Act, 1961. Of course, you need to fulfil all the eligibility criteria to avail this exemption. In many of these schemes, even the interest earning is tax-free.”

Schemes With Tax Deduction 

A majority of post office small schemes, such as PPF, fall in the exempt-exempt-exempt (EEE) category, i.e., the investment, the interest earned, as well as the maturity value are tax-exempt. There are, however, some investments, such as FDs and SCSS, which fall in the ETE category, i.e., the investment and the maturity are tax-free, while the interest earning is taxable.

The prevailing interest rates on such ETE schemes are

  • Post office savings scheme (4.0 per cent) 
  • Post office recurring deposit (5.8 per cent) 
  • Post office monthly income scheme (6.6 per cent) 
  • Post office time deposit - 1 year (5.5 per cent) 
  • Post office time deposit - 2 years (5.5 per cent) 
  • Post office time deposit - 3 years (5.5 per cent) 
  • Kisan Vikas Patra (6.9 per cent) 

The tenure range for these schemes range between 0-5 years. 

In a nutshell, post office small savings schemes are safe investment instruments. Guaranteed returns and low-risk environment makes them attractive for any investor looking for risk-free return with government guarantee. 

“If this restriction is feasible, new investors must definitely participate in these small savings schemes.  However, you can only withdraw the invested amount on maturity or reinvest it,” Parekh further says.

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