What are Small Savings Schemes - types, returns and interest rates

Small Savings Schemes are a set of savings instruments managed by the central government with an aim to encourage citizens to save regularly irrespective of their age. They are popular as they not only provide returns that are generally higher than bank fixed deposits but also come with a sovereign guarantee and tax benefits.

Since 2016, the Finance Ministry has been reviewing the interest rates on small savings schemes on a quarterly basis. All deposits received under various small savings schemes are pooled in the National Small Savings Fund. The money in the fund is used by the central government to finance its fiscal deficit.  Now let us take a look at the different savings schemes.

The schemes can be grouped under three heads - Post office deposits, savings certificates and social security schemes. 

Under Post Office Deposits we have the savings deposit, recurring deposit and time deposits with 1, 2, 3 and 5 year maturities and the monthly income account.

The savings account currently pays an interest of 4% per annum and can be opened individually or jointly with an initial investment of Rs 500.

The recurring deposit that pays 5.8% a year compounded quarterly matures after 60 months from the date of opening. It allows investors to save on a monthly basis with a minimum deposit of Rs 100 per month.

The post office time deposits are akin to fixed deposits. A minimum investment of Rs 1,000 is required to open a time deposit. The one year, two year, three year time deposits fetch an interest rate of 5.5% while the five year deposit earns 6.7% per annum. 

Investments under the 5-year time deposit up to Rs 1.5 lakh further qualifies for benefit under section 80C of Income Tax Act.

Next we have the Monthly Income Account that matures in five years from the date of opening. This scheme offers income to the depositors in the form of monthly interest payments and the current rate is 6​.6​ % per annum.  A maximum of Rs. 4.50 lakh can be deposited in a single account and Rs 9 lakh in Joint account.

Under Savings Certificates, we have the National Savings Certificate and the Kisan Vikas Patra. The National Savings Certificate pays interest at a rate of 6.8% per annum upon maturity after 5 years. The interest that is earned is reinvested into the scheme every year automatically. The NSC also qualifies for tax saving under Section 80C of the income tax act. 

The Kisan Vikas Patra, which is open to everyone, doubles your one-time investment at the end of 124 months signifying a return of 6.9% compounded annually. The minimum investment amount is Rs 1000 while there is no upper limit.

In the third head of social security schemes, there is Public Provident Fund, Sukanya Samriddhi Account and Senior Citizens Savings Scheme.
 

The Public Provident Fund is a popular saving option for long term goals like retirement. It pays 7.1% a year and qualifies for tax benefit under Section 80C of the Income Tax Act. Upon maturity of the account after 15 years, it can be extended indefinitely in blocks of 5 years. The accumulated amount and interest earned are exempt from tax at the time of withdrawal. 

The Sukanya Samriddhi Account was launched in 2015 under the Beti Bachao Beti Padhao campaign exclusively for a girl child. The account can be opened in the name of a girl child below the age of 10 years. The scheme guarantees a return of 7.6% per annum and is eligible for tax benefit under Section 80C of the Income Tax Act. The tenure of the deposit is 21 years from the date of opening of the account and a maximum of Rs 1.5 lakh can be invested in a year. 

And finally, the 5-year ​​Senior Citizen Savings Account can be opened by anyone who is over 60 years to age. It carries an interest of 7.4% per annum payable quarterly and qualifies for Section 80C tax benefit. 

These time-tested and safe mode of investments don’t offer quick returns, but are safer when compared to market-linked schemes.