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Home Articles 5 Safest Small Savings Schemes - NSC, Post Office, Kisan Vikas Patra, PPF, Bonds

5 Safest Small Savings Schemes - NSC, Post Office, Kisan Vikas Patra, PPF, Bonds

IndianMoney.com Research Team | Posted On Monday, June 29,2009, 08:39 PM

5 Safest Small Savings Schemes - NSC, Post Office, Kisan Vikas Patra, PPF, Bonds

 

 

The financial literacy of an individual today is increasing in terms of different investment or tax savings instruments. The risk taking capacity of people to invest in stock markets and mutual funds is also increasing. Regardless of the presence of alternate investment options, small savings schemes continue to be the preferred choice for a great portion of the investing population. The high safety levels tied with attractive returns make small savings schemes a 'most preferred' proposition for most investors.

For those looking at simple tax saving instruments, small saving schemes continue to be an attractive option. Are you breaking your head over how to reduce the tax burden? Your tax consultant will tell you many ways to do that, but there is always one set of investments, which is a safe way to save on taxes. And if you look at returns it is not a bad investment vehicle either. That is, if you are not too anxious on the liquidity part. We are, of course, talking about small saving schemes which have been time-honored tax saving vehicles. These investments are also a good way to cover against any future changes in interest rates.

 

Types of Small Saving Schemes

Here is a list of some of the best small saving schemes, which are available for you.

Features of Small Savings Schemes

Some of the investment instruments under the small savings scheme are listed below along with their features.
 
Instrument
Interest
Term
Min/Max Investment
Tax Benefit
National Savings Certificate
8% compounded half yearly
6 Years
Rs. 100/No upper limit
Section 80C
Post Office Recurring
Deposits
7.5% quarterly compounded
5 Years
Min: Rs.10,
Max: No limit Deposit can be in multiples of Rs. 5/  
No Tax deduction at source.
Public Provident Fund
8% per annum
15 years
Rs 500/Rs 70,000
Section 80C
Kisan Vikas Patra
Amount invested doubles in 8 years 7months
8 years 7 months
Multiples of Rs. 100/ No upper limit
No Tax benefit is available
Relief Bonds
6.5% (Non-Taxable)
8% (Taxable) compounded half-yearly
5 years (6.5%)
6 years (8%)
Rs. 1,000/ No upper limit
6.5% (exempt from income tax), 8.5% (not exempt from income tax)
 

National Savings Certificate

National Savings Certificates (NSC) are certificates issued by Department of post, Government of India and are available at all post office counters in the country. It is a long term safe savings alternative for the investor. The scheme combines growth in money with reductions in tax liability as per the provisions of the Income Tax Act, 1961. Normally the duration of a NSC scheme is 6 years. 
 

Types of National Savings Certificate

Following types of NSC are issued: 
  • Single Holder Type Certificate: This can be issued to: (a) An adult for himself or on behalf of a minor (b) A Trust.
  • Joint 'A' Type Certificate: Issued jointly to two adults payable to both holders jointly or to the survivor.
  • Joint 'B' Type Certificate: Issued jointly to two adults payable to either of the holders or to the survivor.

 

Advantages of National Savings Certificate

Tax benefits are available on amounts invested in NSC under section 88, and exemption can be claimed under section 80L for interest accrued on the NSC. Interest accrued for any year can be considered as fresh investment in NSC for that year and tax benefits can be claimed under section 88. NSCs can be transferred from one person to another through the post office on the payment of a prescribed fee. They can also be transferred from one post office to another. The scheme has the backing of the Government of India so there are no risks linked with your investment.
 
How to Invest in NSC?
 
Any individual for himself or on behalf of minors and trust can purchase a NSC by applying to the Post Office through a representative or an agent. Payments can be made in cash, cheque or DD or by raising a debit in the savings account held by the purchaser in the Post Office. The issue of certificate will be subject to the realization of the cheque, pay order, DD. The date of the certificate will be the date of realization or encashment of the cheque. If a certificate is lost, destroyed, stolen or damaged, a duplicate can be issued by the post-office on payment of the prescribed fee.
 
Who can Invest in NSC?
  • An adult in his own name  
  • An adult on behalf of a minor
  • A trust
  • Two adults jointly
 
NSC Denominations and Limit
 
National Savings Certificates are available in the denominations of Rs. 100, Rs 500, Rs. 1000, Rs. 5000, & Rs. 10,000. There is no maximum limit on the purchase of the certificates. So it is for you to decide how much you want to invest in the NSCs.
 
Maturity Period
 
Period of maturity of a certificate is 6 years. Presently interest paid for NSC is 8 % per annum and is compounded half yearly. Premature encashment of the certificate is not permissible except at a discount in the case of death of the holder(s), forfeiture by a pledgee and when ordered by a court of law.
 
NSC Tax Benefits
 
Interest accrued on the certificates every year is liable to income tax but deemed to have been reinvested.
Income Tax rebate is available on the amount invested and interest accruing under Section 88 of Income Tax Act, as amended from time to time.
Income tax relief is also available on the interest earned as per limits fixed vide section 80L of Income Tax, as amended from time to time.
 
NSC Returns
 
It is having a high interest rate at 8% compounded half yearly. Post maturity interest will be paid for a maximum period of 24 months at the rate applicable to individual savings account. Rs1000 denomination certificate will increase to Rs. 1601 on completion of 6 years.
 
 
Interest for the NSC Certificate of Rs 1000
 
No. of Year
Interest Amount
1 year
Rs 81.60
2 year
Rs 88.30
3 year
Rs 95.50
4 years
Rs 103.30
5 years
Rs 111.70
6 years
Rs 120.80
TOTAL
Rs 601.2
 
 
 
 
 
 
 
 
 
 

Post Office Recurring Deposits

A Post-Office Recurring Deposit Account (RDA) is a banking service offered by Department of post, Government of India at all post offices in the country. The scheme is meant for investors who want to deposit a fixed amount every month, in order to get a lump sum after five years. The scheme, a systematic way for long term savings, is one of the best investment choices for the low income groups. Recurring deposit account is a systematic way of saving money. The scheme is meant for those investors who want to deposit a fixed amount regularly on monthly basis in order to get a good sum after a definite time on the maturity of the account.
 
See Also: Important Post Office Savings Scheme
 
How to Open Post Office Recurring Deposits?
 
The Recurring deposit account can be opened at any post office all across India. Currently 7.5% quarterly compounded rate of interest is paid. Following are allowed to open an account;
  • Any adult
  • Two adults jointly
  • A guardian on behalf of a minor or a person of unsound mind.
  • A minor who is minimum ten years
 
Maturity Period for Post Office Recurring Deposits
 
Period of maturity of account is 5 years. Sixty equal monthly deposits shall be made in an account in multiples of Rs. 5/- subject to a minimum of 10 rupees. If it is a joint account, it is paid on maturity;
 
a) Jointly or survivor
b) To either of them or survivor
 
Premature Closure
 
Premature closure of accounts is permitted after expiry of three years. In case of premature closure of account, the interest at the rate applicable to post office savings account shall be payable.
 

Loan Against Deposit

50% of the deposits made in the account may be allowed as loan after the account has been in operation for minimum one year.
 
Extension and Retention of Account
 
Post maturity, account holders could decide to continue account for a further period of five years and make monthly deposits during such extended period. The depositors could also decide to continue the account and retain in it the amount of repayment due for a further period upto maximum of five years without making any fresh deposits.
 
Post Office Recurring Deposit Tax Exemption
 
There is no Tax Deduction at source for the returns from the investment
 
Rebate on advance deposits
 
1.
Deposits: - Six or more but not exceeding eleven deposits made in a calender month.
Rebate: - Rs. 10/- for an account of Rs. 100/- denomination
 
2.
Deposits: - Twelve or more deposits made in a calender month.
Rebate: - Rs. 40/- for every twelve deposits of Rs. 100/- denomination
 
Comparison Between Post office RDs and Bank RDs
  • Post office recurring deposit account (RDA) has a fixed tenure of five years. Bank recurring deposits offer a flexible time period. A bank RDA can be opened for a minimum period of 6 months, and thereafter in multiples of 3 months up to a maximum period of 10 years.
  • The minimum investment in post office RDA is Rs.10. In case of banks minimum investment varies. Minimum monthly installment in case of recurring deposit with SBI is Rs.100, where as it is Rs.500 in case of ICICI.
  • Post-office deposits offer a fixed rate of return for the duration of the deposit, while banks constantly review their recurring deposit rates.
  • Bank RDAs are more convenient in the sense that the amount is automatically debited from your account. In case of post office RDAs you will have to visit post office every month.
  • In post office RDA, one can withdraw up to half the balance. On premature closure of the account (after one year), interest is payable as per the rate for the Post Office Savings Bank Account. Premature closure in case of Bank RDA will result in a penalty and the depositor will get interest around 1 per cent less than the prevailing rate. But in any case it will be higher than the interest rate for Post Office Savings Bank Account.
 

Kisan Vikas Patra

Kisan Vikas Patra (KVP) is a saving instrument that offers interest income similar to bonds. Amount invested in Kisan Vikas Patra doubles on maturity after 8 years & 7 months. Some people have a misunderstanding that only a farmer can invest money in Kisan Vikas Patra. However, it is absolutely false. Anyone wishing to invest money at safe places can go for Kisan Vikas Patra. Following are the important features of KVP;
 
  • KVPs can be pledged as security against a loan to Banks/Govt. Institutions.
  • KVPs are transferable to any Post office in India.
  • KVPs can be transferable from one person to another person before maturity.
  • Nomination Facility is available in case of KVPs
  • Duplicate can be issued for lost, stolen, destroyed, mutilated and defaced KVPs
 
How to Invest in Kisan Vikas Patra?
 
One can invest in any head post office / sub-post office in cash, demand draft, or local cheques. You just have to walk into a post office, and meet a clerk looking after KVP issues. He will give you a form. You just have to fill the form and submit it with the preferred amount. A KVP would be issued to you. However, be mindful of taking a few of photographs of yours with you. You would need them to put on the form. Kisan Vikas Patra can be purchased by the following:
  • An adult in his own name, or on behalf of a minor
  • A Trust
  • Two adults jointly 
Who is not eligible?
  • Commercial Companies and institutions are not eligible to purchase KVP.
  • NRIs and Hindu Undivided Families cannot purchase Kisan Vikas Patra.
Denominations
 
Kisan Vikas Patra is available in the denominations of Rs 100, Rs 500, Rs 1000, Rs 5000, Rs. 10,000 and Rs. 50,000. There is no maximum limit on purchase of KVPs.
 
Kisan Vikas Patra Withdrawal
 
Premature encashment of the certificate is not permissible except at a discount in the case of death of the holder(s), forfeiture by a pledgee and when ordered by a court of law.
 
Maturity Period for Kisan Vikas Patra
  • Facility of reinvestment on maturity.
  • Maturity proceeds which are not drawn are eligible for Post office Savings account interest for a maximum period of two years.
Kisan Vikas Patra Tax Benefit
 
No income tax benefit is available under the Kisan Vikas Patra scheme. Interest income is taxable; however, the deposits are exempt from Tax Deduction at Source (TDS) at the time of withdrawal. KVP deposits are exempt from Wealth tax.
 
 

Public Provident Fund 

Public Provident Fund, popularly known as PPF, is a savings cum tax saving instrument. It also works as a retirement planning tool for many of those who do not have any structured pension plan covering them. The balances in PPF account cannot be attached by any authority normally. Following are the important features of PPF.  
 
  • The maturity period of the account is 15 years.
  • Rate of interest is 8% compounded annually.
  • One deposit with a minimum amount of Rs.500/- is mandatory in each financial year.
  • The amount of deposit can be varied to suit the convenience of the account holders.
  • The account holder can retain the account after maturity for any period without making any further deposits. In this case the account will continue to earn interest at normal rate as admissible till the account is closed.
  • The account holder also has an option to extend the PPF account for any period in a block of 5 years at each time, after the maturity period of 15 years.
 
How to Open PPF Account?
 
Public Provident Fund account can be opened at designated post offices throughout the country and at designated branches of Public Sector Banks throughout the country. The account can be opened by an individual in his own name, on behalf of a minor of whom he is a guardian. Following are allowed to open the account:
  • Single
  • Joint (Two or more)
  • Minor with parent/guardian
  • HUF
  •  

PPF Denominations

Minimum deposit required in a PPF account is Rs. 500 in a financial year. Maximum deposit limit is Rs. 70,000 in a financial year. Maximum number of deposits is twelve in a financial year.

 
Lapse in Deposits
 
If deposits are not made in a PPF account in any financial year, the account will be treated as discontinued. The discontinued account can be activated by payment of the minimum deposit of Rs.500/- with a default fee of Rs.50/- for each defaulted year.
 
PPF Withdrawal
 
Premature closure of a PPF Account is not permissible except in case of death. Nominee/legal heir of PPF Account holder cannot continue the account after the death.
Premature withdrawal is permissible in the 7th year of the account subject, to a limit of 50% of the amount at credit preceding three year balance. Thereafter one withdrawal in every year is permissible.
 
Account Transfer
 
The Account is transferable from one post Office / bank to another and from post Office to bank or from a bank to a post office.
 
PPF Tax Benefits
 
Deposits in PPF are eligible for rebate under section 80-C of Income Tax Act.
The interest on deposits is totally tax free and Deposits are exempt from wealth tax.
 
PPF Features
 
Following are the important features of Relief Bonds
 
  • Individuals, may hold the bonds singly or jointly, or on `anyone or survivor' basis or on behalf of a minor as father, mother or legal guardian. HUFs also can subscribe. These are not available to NRIs.
  • Investors can opt for either half-yearly or cumulative interest. For the tax-free bond, the cumulative value at maturity is Rs 1,376.90 on a face value of Rs 1,000 and it is Rs. 1,480.25 for the taxable bond.
  • The old bonds will continue to enjoy the old rates until their maturity.
  • There is no maximum limit on investment in the bonds. Investments can be made in multiples of Rs 1,000.
  • The tax-free bonds shall not be transferable except by way of gift to a relative as defined in Section 6 of the Indian Companies Act, 1956, by execution of an appropriate transfer form and execution of an affidavit by the holder. The taxable bonds cannot be gifted.
  • The bonds shall not be tradeable in the secondary market and shall not be eligible as collateral for loans from banks, financial institutions and non-banking financial companies (NBFC) etc.

Relief Bonds

 

Drought Relief Bonds (DRBs) also known as Rahat Patras' were introduced on December 1, 1987 to enable the government to fight the unprecedented drought. It is not known whether they helped to fight the drought but they surely attracted a flood of investors. After the drought was contained, DRBs were scheduled to go off the counter in February 1988. However, since the instrument had become very popular, it was extended and the word drought was deleted. Now it is known as Relief Bonds. There are two kinds of relief bonds such as tax free and Taxable. First one will give you 6.5% interest and the taxable bonds will give you a return of 8%.

 
See Also: Why to invest in PPF?
 
Premature encashment
 
Tax-free Bonds can be surrendered after a minimum lock-in of three years from the date of issue, any time after the sixth half year but redemption payment will be made on the following interest payment due date. Thus the effective date of premature encashment will be July 1 and January 1 every year. However, 50 per cent of the interest due and payable for the last six months of the holding period will be recovered in such cases both in respect of cumulative and non-cumulative bonds.
 
All the above mentioned schemes will help you in parking your savings in a safe and profitable avenue. If you are looking for a safe investment with relatively good returns these are the best choices for you.

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