Should taxpayers still invest in small savings schemes such as PPF, SCSS and NSC over FDs?

Taxpayers who have opted for the new tax regime are not entitled to claim tax deduction (section 80 C) for investing in small savings schemes which include but not limited to Senior Citizens Savings Scheme, National Savings Certificate (NSC), Public Provident Fund (PPF) and Kisan Vikas Patra (KVP).

Typically, investors opt for these schemes to claim income tax deduction under section 80C of I-T Act. Without an entitlement for this deduction, investors wonder whether to opt for these schemes or other schemes which do not have any lock-in period such as an FD (fixed deposit).

Let us understand how these schemes are different from regular savings schemes.

FDs Vs post office schemes: A comparison

I. Interest rate: Most small savings schemes offer higher interest than what FDs offer. While most FDs offer around 6-6.5 percent interest per annum on deposits, small savings schemes give higher than 7% per annum.

For instance, Post Office Monthly income scheme offers 7.4%, senior citizens savings scheme offers 8.2%, Kisan Vikas Patra offers 7.5%, PPF 7.1% and Sukanya Samriddhi Account 8.2%. Read this Livemint sarticle for all the latest rates offered by small savings schemes.

II. Tax on income earned: Another key feature of small savings schemes is that the income earned on these schemes is still not taxable, even under the new tax regime. Let us suppose a bank gives 7 percent on an FD scheme.

For a taxpayer who falls under 10% tax bracket would be made to pay 10% tax on his income, thus leaving only 6.3% with him. On the other hand, interest earned on small savings schemes remains tax free even in the new tax regime.

III. Investing discipline: Another important difference is that small savings schemes inculcate an investing discipline. This happens because of long lock-in period.

When you invest in a scheme like PPF which has a lock-in period of 15 years then you are taking a step towards your retirement saving. Similarly, when you invest in Sukanya Samridhi Yojana, you allocate a portion of your savings for the future of your child.

“Investing a part of your portfolio (around 30%) in fixed income instruments is advisable for long term wealth creation. When your financial goals are due after a long time, say 15 years, then it is recommended to invest in small savings schemes along with FDs, gold and debt funds,” says Deepak Aggarwal, chartered accountant and a Delhi-based wealth advisor.

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