In my earlier post - Rebalancing Portfolio I had mentioned that small savings can be a part of the debt component of one's portfolio.
Several changes, implemented from December 2011 have been announced in small savings schemes. Take a look here at the round-up of what you get from which instrument and make your choice...
To make the return on small savings more realistic, the government had decided to link rates to the average yield on G-Secs of similar maturity during the preceding year. The rate of returns on small savings instruments will be announced every year on or before 1st April. Investors get G-sec rate plus 25-100 basis points (bps) i.e 0.25% to 1% higher, depending on the instrument.
PPF: A must invest
PPF returns are now approximately 25 bps (0.25%) more than the 10-year G-Secs. This means PPF will give 0.25% more than the average yield on 10-year G-secs during the preceding calendar year. For the 2011-12 the rate was set as 8.6% against 8% earlier. For 2012-2013, the rate has been increased to 8.8%. Thus, the contribution you make as well as the entire earlier balance would earn 8.8% interest in 2012-13. Currently PPF has an edge over other small savings instruments because of the tax benefit.
Tax Benefit EEE retained: Investment in PPF qualifies for a tax deduction up to Rs. 1 lakh u/s 80C of the Income-tax Act. On withdrawal the entire amount is tax exempt. An 8.8% risk free, tax free rate makes PPF extremely attractive as an investment. Even if interest rates go down, the tax incentive makes it very attractive with higher yield than 10 year G-Secs.
Scheme | Earlier | Now |
PPF | Interest - 8.6%; - EEE benefit | Interest - 25 basis points above 10 yr. G-Sec, 8.8 % this year; Investible amount 1,00,000.00; tax benefits EEE retained |
Senior Citizens Savings Scheme: Bank tax-saving FDs currently offer higher rates
The rate on Senior Citizen Savings Scheme (SCSS) would be upto 100 bps (1%) more than the G-Sec rate and for the 2011-12 the rate was unchanged at 9%. The same has been increased to 9.3% for 2012-13. The investment under this scheme, meant for senior citizens (above 60 years) qualifies for a deduction under section 80C and this is a five year scheme. However, the interest is taxable.
Scheme | Earlier | Now |
SCSS | Interest - 9%; 5 yr. Scheme; | Interest - 100 basis points above G-Sec; this year 9.3%, dedcution u/s 80 C continues; |
PO MIS: Not so attractive
The post office monthly income scheme is a five year scheme and you get 0.25% interest more than the five-year G-Secs. Bonus was done away with. It compares poorly currently with Bank FDs. The interest for 2011-12 was 8.2% . The same has been increased to 8.5% - again not too great in the current scenario. The bonus on maturity was removed earlier!
Scheme | Earlier | Now |
PO MIS | Interest - 8.2% | Interest - 25 basis above 10 yr. G-Sec, 8.5 % this year; (maturity 5 years) |
NSC:
A new National Savings Certificate (NSC) for 10 years had been introduced. The returns on new 10-year NSC has been benchmarked to 10-year G-secs with positive mark-up of 50 bps (0.50%). For 2011-12, the rate was 8.7% per annum. The same has been increased to 8.9%
The old NSC had been reduced from six years to five years. The returns on the five-year NSC will be approximately 0.25% higher than the 5 year G-Secs and is increased to 8.6% for 2012-13. The investments in NSC qualify for a deduction under section 80C. However, the PPF is more attractive as an investment option due to the EEE tax benefit.
Scheme | Earlier | Now |
NSC | 5 yr. Scheme - Interest 8.4%, deduction u/s 80C 10 yr shceme - 8.7% | 5 yrs scheme 8.6%. 10 yrs scheme - 8.9% this yr;Deduction retained u/s 80C; interest taxable |
Note: The Kisan Vikas Patra has been discontinued since 2011-12.
PO Time Deposits – also market linked:
Premature withdrawal has now been allowed for PO Time Deposits. The interest paid would be 1% less than the time-deposits of comparable maturity. For premature withdrawals made between 6 and 12 months investors would be paid at the PO Savings Bank rate of 4%. The highest rate for a 5 year deposit currently is 8.5%. 1, 2 and 3 year deposits will fetch 8.2%, 8.3% and 8.4% respectively this year. Banks offer more attractive rates currently.
A five year RD will fetch you 8.4%.
Please note that the interest on PPF will vary on your deposits every year. However, the interest on FDs will be the rate at which you enter. for exmaple if you place an amount in FD for 5 years on 3.4.12, the interest on the FD will fetch you 8.5% throughout and will not change.
A five year RD will fetch you 8.4%.
Please note that the interest on PPF will vary on your deposits every year. However, the interest on FDs will be the rate at which you enter. for exmaple if you place an amount in FD for 5 years on 3.4.12, the interest on the FD will fetch you 8.5% throughout and will not change.
The interest rate on these instruments for the current year has thus gone up. Do keep in mind that interest rates would vary in future and look out for the the yearly announcement of the interest rates!
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