Even after the sharp fall in interest rates, post-office small savings instruments remain indispensable for marginal tax-payers as they combine tax rebates with stable returns and zero risk.
Over the past 18 months, interest rates have shrunk substantially, yet investors continue to queque up for post-office savings schemes(POSSs). For the vast majority of Indians, POSSs continue to be one the most traditional and trusted ways of saving their money. Their relatively low interest rates don't seem to have dimmed the enthusiasm either -- it seems that the generous dollop of tax breaks more than adequately offsets that drawback.
Another advantage of these type of schemes is that cheques issued by the post office can be easily deposited in your bank account or used anywhere in the country.
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Still, because most of these schemes are sugarcoated with tax benefits, they do involve some kind of lock-in period. If you do find yourself in need of emergency funds, however, you can always use your postal deposits as collateral to raise a bank loan.
With hundreds of post offices across the country, it's easy to learn about and invest in a post office scheme. In addition, there are hundreds of financial agents who will do all the paperwork for you.
The most popular POSSs include the public provident fund, national savings certificate and scheme, recurring and time deposits and "kisan vikas patras". Let's look at each one in turn.
Public Provident Fund (PPF): Undoubtedly, one of the most preferred tax-saving instruments for many Indian tax-payers. You can open a PPF account with a post office or any branch of the State Bank of India (or associate banks). A 15-year scheme, you need to invest a minimum of Rs 100 to open an account. You can invest up to a maximum of Rs 60,000 in any financial year. Your investment can either be in a lumpsum or instalments (not more than 12 in any year). The current rate of interest on this scheme is 9.5 per cent compounded annually. The accrued interest, while not paid to you, is tax-free.
Withdrawals and loans are allowed against an PPF account, but there are certain conditions. Withdrawals can be made only from the seventh year; that can be followed by one withdrawal every subsequent year. Withdrawals are capped at 50 per cent of the balance at the end of the fourth preceding year or the year immediately preceding the year of withdrawal, whichever is lower.
In case of a loan, you can put up your account as collateral but only from the third year of deposit. Besides, the loan cannot exceed 25 per cent of the balance in your account. It also has to be repaid in 36 instalments at an interest rate that is a per cent higher than the rate on your PPF account. PPF deposits qualify for a tax rebate under Section 88 of the Income Tax Act. The rebate cango up to Rs 12,000 on the maximum annual contribution of Rs 60,000.
National Savings Certificate (NSC): Another well-known savings vehicle, it's designed to enable every Rs 100 of investment to grow to Rs 174.52, at the end of the stipulated tenure of six years. That translates into a 9.5 per cent return, compounded half-yearly. You can invest in certificates of Rs 100, 500, 1,000, 5,000 and 10,000. But remember, the tax breaks you're hunting for will be available only for investments up to Rs 60,000 in any financial year.
One unique feature about the NSC is that all interest accrued until the fifth year is considered to be re-invested in the scheme. The result: you can invest a little lesser in later years and yet reap the benefits under Section 88 since the interest considered re-invested is eligible for tax rebate. NSC interest also qualifies for tax benefits under Section 80L, up to Rs 9,000.
NSCs can be transferred after a year. They can also be encashed before the end of their tenure. You will receive the principal and interest, although this will effectively be at a lower rate. National Saving Scheme (NSS): An annual 9.5 per cent return tags along with this 6-year investment option. You can invest as much as you want in this scheme, but tax breaks will be available only on investments up to Rs 60,000 in any financial year.
While investors are not allowed to withdraw the principal before the completion of four years, the interest can be withdrawn at any point in time. One point of distinction compared with NSCs: interest accrued does not qualify under Section 88. Therefore, a separate account had to be opened for each financial year to get the benefit of the full rebate. However, the interest is eligible for exemption under Section 80L.
Recurring deposits: Under this scheme, investors have to make 60 equated deposits -- in other words, a deposit every month, stretching over five years. You can withdraw from the deposit only once and only after a year and 12 deposits. You can withdraw upto 50 per cent of the balance in your account. Interest earned is tax-exempt under Section 80L.
Time deposits: You can opt for one, two, three and five-year deposits. Interest rates range from 7.5 to 9 per cent. Withdrawals are allowed only after six months and any withdrawal before a year will not earn any interest.
Kisan Vikas Patra: This scheme is designed to double your money in a specified period of time. With slipping interest rates, this period of time has lengthened in recent years. Currently, you can double your investments in seven years and three months. KVPs are available in denominations of Rs 100, 500, 1000, 5,000, 10,000 and 50,000. You can invest as much as you want and demand an early withdrawal.
While it seems pleasing, there are no tax benefits associated with this investment.