Saving Schemes

Introduction

Saving schemes are financial instruments designed to help individuals accumulate and grow their wealth over time. These schemes offer various benefits, including tax advantages, guaranteed returns, and flexible investment options. In India, various saving schemes cater to different financial goals and risk appetites. Whether saving for a short-term goal or planning for long-term security, understanding the various saving schemes available can help you make informed decisions and maximize your savings potential.

Types of Saving Schemes in India

India offers a plethora of saving schemes that cater to the diverse needs of its population. Here are some of the most popular saving schemes:

India offers a variety of savings schemes or we can say money-saving schemes to cater to different financial needs and investment goals. Here’s a detailed explanation of each of the specified savings schemes:

1. Public Provident Fund (PPF)

• Purpose: Long-term savings and retirement planning.
• Tenure: 15 years, extendable in blocks of 5 years.
• Interest Rate: Determined by the government every quarter; generally higher than regular savings accounts.
• Tax Benefits: Interest earned and maturity amount are tax-free under Section 80C.

Features:

1. Minimum deposit: ₹500 per year.
2. Maximum deposit: Up to Rs. 1.5 lakh per year.
3. Partial withdrawals are allowed after the 7th year.
4. Loans can be availed against the balance from the 3rd to the 6th year.

2. National Savings Certificate (NSC)

• Purpose: Encourages small savings and tax savings.
• Tenure: 5 years.
• Interest Rate: Fixed by the government; compounded annually but paid at maturity.
• Tax Benefits: Investment Up to Rs. 1.5 lakh qualifies for a deduction under Section 80C.

Features:

1. Minimum investment: ₹100.
2. No upper limit on investment.
3. Interest is reinvested and qualifies for tax benefit under Section 80C.

3. Kisan Vikas Patra (KVP)

• Purpose: Long-term investment option primarily aimed at farmers.
• Tenure: The maturity period varies depending on the prevailing interest rate; generally around 10 years and 4 months.
• Interest Rate: Fixed; the investment doubles at maturity.
• Tax Benefits: No specific tax benefits.

Features:

1. Minimum investment: ₹1,000.
2. No maximum limit.
3. Available at all post offices.
4. Can be encashed after a lock-in period of 2 years and 6 months.

4. Senior Citizens Savings Scheme (SCSS)

• Purpose: Provides regular income to senior citizens with monthly saving schemes plan.
• Tenure: 5 years, extendable by 3 years.
• Interest Rate: Determined by the government, usually higher than other fixed-income instruments.
• Tax Benefits: Eligible for tax deduction under Section 80C. Interest income is taxable.

Features:

1. Minimum investment: ₹1,000.
2. Maximum investment: Up to Rs. 30 lakh.
3. Interest is paid quarterly.
4. Premature withdrawal is allowed after one year, with a penalty.

5. Sukanya Samriddhi Yojana (SSY)

• Purpose: Secure the future of the girl child by providing financial support for education and marriage.
• Tenure: Maturity is 21 years from the date of account opening or upon the marriage of the girl after 18 years. Partial withdrawal is allowed after the girl turns 18.
• Interest Rate: Higher than most government-backed savings schemes; compounded annually.
• Tax Benefits: Tax exemption under Section 80C; interest and maturity amount are tax-free.

Features:

1. An account can be opened in the name of a girl child below the age of 10.
2. Minimum deposit: ₹250 per year.
3. Maximum deposit: Up to Rs. 1.5 lakh per year.
4. Deposits are to be made for 15 years from the date of account opening.

6. Post Office Monthly Income Scheme (POMIS)

• Purpose: The post office monthly income scheme provides regular monthly income.
• Tenure: 5 years.
• Interest Rate: Post office savings schemes are fixed by the government; interest is paid monthly.
• Tax Benefits: No specific tax benefits are included in post office savings schemes; interest is taxable.

Features:

1. Post office time deposit minimum amount: ₹1,500.
2. Post office time deposit maximum amount: ₹9 lack for a joint account and ₹4.5 lacks for a single account.
3. Premature closure is allowed after 1 year, with a penalty.

7. Employee Provident Fund (EPF)

• Purpose: Retirement savings for employees in the formal sector.
• Tenure: Continuous till retirement or withdrawal.
• Interest Rate: Determined annually by the EPFO (Employees’ Provident Fund Organisation).
• Tax Benefits: Contributions, interest earned, and the maturity amount are tax-free if held for 5 years or more.

Features:

1. Both employee and employer contribute 12% of the employee’s basic salary and dearness allowance.
2. Partial withdrawal is allowed for specific purposes like medical emergencies, education, marriage, etc.
3. A pension component is also contributed (EPS – Employee Pension Scheme).

8. National Pension System (NPS)

• Purpose: Voluntary retirement savings scheme.
• Tenure: Up to 60 years of age (can be extended to 70 years).
• Interest Rate: Market-linked returns, as the investment is in equities, government bonds, and corporate bonds.
• Tax Benefits: Contributions eligible for tax deduction under Section 80C and an additional ₹50,000 under Section 80CCD(1B). Annuity income is taxable.

Features:

1. Minimum annual contribution: ₹1,000.
2. At maturity, 60% of the corpus can be withdrawn tax-free; the remaining 40% must be used to purchase an annuity.
3. Offers two types of accounts: Tier-I (retirement account) and Tier-II (voluntary savings account).

Also Read: UAN Member Portal

What are Equity Linked Savings Scheme?

Equity Linked Savings Schemes (ELSS) are a type of mutual fund in India that invest primarily in equity (stocks) and offer tax benefits under Section 80C of the Income Tax Act. They are a popular investment choice for individuals looking to gain exposure to equity markets while also saving on taxes.

Key Features of ELSS

1. Equity Exposure:

Equity Linked Savings Scheme funds invest a major portion of their corpus in equities or equity-related instruments. This provides investors with the potential for higher returns compared to traditional saving instruments, though with higher risk.

2. Tax Benefits:

Investments in Equity Linked Savings Scheme are eligible for tax deductions of up to ₹1.5 lakh under Section 80C of the Income Tax Act. This makes them a tax-efficient way to invest in the stock market.

3. Lock-in Period:

Equity Linked Savings Schemes have a mandatory lock-in period of 3 years, which is the shortest among all tax-saving instruments under Section 80C. This means investors cannot redeem their investment before three years from the date of investment.

4. Potential for Higher Returns:

Being equity-oriented, ELSS has the potential to offer higher returns compared to debt-oriented tax-saving instruments like PPF or NSC. However, they also come with higher risks due to market volatility.

5. Dividend and Growth Options:

Investors can choose between the dividend and growth options in ELSS funds. In the growth option, returns are reinvested and realized at the time of redemption. In the dividend option, investors receive dividends when the fund declares them.

6. Flexibility:

Equity Linked Savings Schemes do not have a fixed maturity period beyond the lock-in period. Investors can stay invested as long as they wish, making it a flexible investment option.

Risks Associated with ELSS

1. Market Risk:

Being equity-oriented, ELSS funds are subject to market risks. The value of the investment can fluctuate based on market conditions.

2. Volatility:

The returns from Equity Linked Savings Schemes can be volatile in the short term due to market movements, making them less suitable for risk-averse investors.

Who Should Invest in ELSS?

ELSS is suitable for investors who:

• Individuals who are looking for tax-saving investments with the potential for high returns
• Have a risk appetite to withstand market volatility.
• Are willing to lock in their investment for at least three years.
• Are looking for long-term capital appreciation and wealth creation.

Investors should assess their risk tolerance, investment goals, and time horizon before investing in ELSS. Additionally, consulting with a financial advisor can help in making an informed decision.

How to Choose the Best Saving Schemes in India?

Choosing the best saving scheme depends on several factors, including your financial goals, risk tolerance, investment horizon, and tax considerations. Here are key factors to consider when selecting a saving scheme:

1. Financial Goals

Short-term Goals: For goals that need to be achieved within a few years, consider schemes like Fixed Deposits, Post Office Monthly Income Scheme (POMIS), and Recurring Deposits.

Long-term Goals: For long-term objectives like retirement or children’s education, consider options like Public Provident Fund (PPF), National Pension System (NPS), and Sukanya Samriddhi Yojana (SSY).

2. Risk Tolerance

Low Risk: If you have a low-risk tolerance, opt for government-backed schemes like PPF, NSC, SCSS, and KVP, which offer guaranteed returns.

Moderate to High Risk: For higher returns and a higher risk appetite, consider market-linked options like NPS, Mutual Funds, or even equities.

3. Tax Benefits

Consider the tax implications of the scheme. For example, PPF, SSY, and certain NPS contributions offer tax benefits under Section 80C. The interest and maturity amounts may also be tax-free in some schemes.

4. Liquidity

Assess the liquidity of the investment. Some schemes, like PPF and EPF, have a lock-in period, whereas others, like Fixed Deposits or Liquid Mutual Funds, offer easier access to your funds.

5. Interest Rate and Returns

Compare the interest rates and potential returns across different schemes. While some schemes offer fixed returns (e.g., NSC, SCSS), others may offer variable returns based on market performance (e.g., NPS).

6. Tenure and Lock-in Period

Consider the investment duration and lock-in period. Long-term schemes generally offer better returns but may lock your funds for extended periods.

7. Age and Eligibility

Some schemes are age-specific or designed for specific demographics, such as SCSS for senior citizens or SSY for parents of girl children.

8. Inflation Protection

Evaluate whether the scheme offers returns that can outpace inflation, ensuring that your savings’ purchasing power does not diminish over time.

Benefits of Saving Schemes

1. Capital Preservation:

Savings schemes, particularly those backed by the government, offer a safe avenue for preserving capital, with low to zero risk of loss.

2. Regular Income:

Schemes like SCSS and POMIS provide regular income, making them ideal for retirees or those seeking a steady cash flow.

3. Tax Benefits:

Many savings schemes offer tax deductions under various sections of the Income Tax Act, reducing the overall tax liability. For example, investments in PPF, NSC, and NPS are eligible for deductions under Section 80C.

4. Encourages Savings Discipline:

Regular contributions and a lock-in period encourage disciplined savings, helping individuals build a corpus over time.

5. Retirement Planning:

Schemes like EPF, PPF, and NPS are excellent for long-term retirement planning, providing financial security in old age.

6. Child’s Future Security:

Schemes like SSY help parents save systematically for their daughter’s education and marriage, ensuring financial support for future needs.

7. Wealth Accumulation:

Through compounded interest, saving schemes can help in accumulating wealth over time, even with relatively small regular contributions.

8. Financial Security:

Having savings provides a financial cushion for emergencies, reducing the need to rely on loans or credit.

9. Diversification:

Saving schemes offer a way to diversify investments across various financial instruments, reducing overall portfolio risk.

10. Peace of Mind:

Investing your money in secure and reliable schemes provides peace of mind, especially during economic uncertainties.

Factors to Consider Before Investing in Saving Schemes

1. Interest Rates: Compare the interest rates across different schemes to ensure you are getting the best returns on your investment.
2. Lock-in Period: Understand the lock-in period of each scheme. Some schemes have long lock-in periods which might not be suitable for short-term goals.
3. Liquidity: Consider the liquidity of the investment. Some schemes, like PPF, have restrictions on withdrawals, whereas others like POMIS provide regular payouts.
4. Tax Implications: Be aware of the tax implications of the interest earned. While some schemes offer tax-free interest, others might have taxable returns.
5. Investment Goals: Align your investment with your financial goals. For instance, if you’re saving for retirement, long-term schemes like NPS might be more appropriate.

Popular Bank Saving Schemes

Several banks in India offer specialized saving schemes with competitive interest rates and benefits:

1. Fixed Deposits (FDs): Fixed deposits are one of the most popular saving schemes offered by banks, providing higher interest rates compared to regular savings accounts.
2. Recurring Deposits (RDs): RDs allow you to deposit a fixed amount every month and earn interest, helping you build a substantial corpus over time.
3. Savings Accounts: Many banks offer high-interest savings accounts with additional benefits like insurance and cashback offers.

Conclusion

Saving schemes are a crucial component of a well-rounded financial plan. They provide security, tax benefits, and a steady income, catering to various financial goals and risk appetites. By understanding the different saving schemes available in India, you can make informed decisions that align with your financial objectives.

Whether you’re a conservative investor seeking guaranteed returns or someone looking for tax-efficient retirement planning, there’s a saving scheme out there to meet your needs.