As part of the quarterly revision in interest rates of small savings schemes, the interest rates for these schemes saw a sharp hike for the October to December quarter. For example, the interest rates for the public provident fund (PPF), 5-year post office deposit scheme, National Savings Certificate (NSC), Sukanya Samriddhi Account Scheme and Senior Citizen Savings Scheme have been hiked sharply by 40 basis points. Expecting a higher influx into small savings schemes after the latest interest rate hike, the government had last month announced a sharp reduction in the gross marketing borrowing estimate for 2018-19. Apart from attractive interest rates and a secure investment option for small investors, these schemes also provide income tax benefits.
Some of the post office schemes that offer income tax benefits:
Public Provident Fund (PPF)
After the latest revision, the interest rate on the PPF, one of the most popular small savings schemes, has been hiked to 8% for this quarter, up from 7.6% earlier. In terms of income tax benefits, the PPF, which has a maturity period of 15 years, enjoys EEE, or exempt, exempt and exempt, status. This means your contributions up to ₹ 1.5 lakh a year qualify for tax deduction under Section 80C of the Income Tax Act; then the interest earned is not taxable, and the amount at maturity, too, is exempt from tax.
“Public Provident Fund (PPF) holder will now enjoy interest rate at the rate of 8% whereas it was 7.6% in the last two quarters. Increased rate will benefit small investors and it would push investments, especially in the PPF, as it enjoys EEE status in income tax," says Naveen Wadhwa, DGM of Taxmann.com.
Even partial withdrawals from the PPF do not attract taxes.
The minimum amount that must be deposited in a PPF account in a financial year is ₹ 500 and the maximum allowed is ₹ 1.5 lakh. An individual can hold a PPF account in his name and even open one in the name of a minor, but the combined contribution cannot exceed ₹ 1.5 lakh in a financial year.
Sukanya Samriddhi Scheme
Apart from post offices, the popular girl child savings scheme Sukanya Samriddhi accounts can be opened in designated banks. The interest rate on Sukanya Samriddhi accounts has been hiked to 8.5%, from 8.1% earlier. In terms of income tax implications, the Sukanya Samriddhi scheme also enjoys EEE status, making it one of the most tax efficient schemes, like the PPF. Annual deposit of up to Rs. 1.5 lakh in the popular girl child savings scheme Sukanya Samriddhi Yojana qualifies for tax deduction under Section 80C.
Under a recently amended rule, known as Sukanya Samriddhi Account (Amendment) Rules, 2018, the minimum amount required for opening a Sukanya Samriddhi account has been brought down to ₹ 250 from ₹ 1,000 earlier. Similarly, the minimum annual deposit requirement, or the minimum amount required to be deposited in Sukanya Samriddhi account every year, has also been lowered to ₹ 250 from ₹ 1,000 earlier.
5-Year Post Office Time Deposit Scheme
Investment in the 5-year post office deposit scheme qualifies for tax deduction up to ₹ 1.5 lakh per financial year, just like bank five-year FDs. Interest earned in this scheme is fully taxable. The scheme comes in with a lock-in period of five years. In 5-year post office deposit schemes, the interest is payable annually but calculated on a quarterly basis. Currently, the 5-year post office deposit scheme fetches 7.8%, higher than the 7.4% offered in the previous quarter. Post offices also offer deposit schemes of less than five years, but these do not qualify for tax benefits under Section 80C.
NSC or National Savings Certificate
The five-year NSC or the National Savings Certificate have also seen a rate hike. The interest rate on the NSC has gone up to 8%, from 7.6%. In other words, ₹ 100 invested in the NSC grows to ₹ 146.93 after five years, payable on maturity. There is no upper limit for investment in the NSC and the minimum investment required is ₹ 100.
Deposits of up to ₹ 1.50 lakh in the NSC in a financial year qualifies for tax deduction under Section 80C. Interest accrued yearly on NSCs is deemed to be reinvested on behalf of the investor and qualifies for deduction under Section 80C within the total limit of ₹ 1.5 lakh. But as the final year’s or the fifth year’s interest is not reinvested, it cannot be claimed as a deduction from taxable income under Section 80C. Therefore, the last year’s interest income is added to the certificate-holder’s income and taxed accordingly.
Senior Citizen Savings Scheme (SCSS)
The Senior Citizen Savings Scheme currently pays interest at the rate of 8.7% per annum, with payouts at the end of each quarter. The maturity period is five years. An individual cannot invest more than ₹ 15 lakh under this scheme. Investment of up to ₹ 1.5 lakh in the Senior Citizen Savings Scheme qualifies for Section 80C tax benefits but the interest earned is taxable. An individual of the age of 60 years or more can open the Senior Citizen Savings Scheme account but there is relaxation for those who have opted for early retirement.