Small savings schemes explained: Interest rates, tax benefits, and why they remain a safe investment option

Small savings schemes

These are investment instruments that are backed by the government and offered through post offices or authorised banks. These are considered safe and offer capital protection because of the sovereign guarantee. The interest rates for these schemes are periodically reviewed by the government, and are typically higher than the bank savings rates. Since these offer low risk and tax exemptions, they have been preferred by a large majority of the population over the years.

Some of the popular savings schemes include the Public Provident Fund, National Savings Certificate, Senior Citizens’ Savings Scheme, Post Office Monthly Income Scheme, Post Office Time Deposit, Sukanya Samriddhi Yojana, Mahila Samman Savings Certificate, among others.

Small savings schemes

Objective

The government’s objective in starting the savings schemes was to inculcate the habit of saving so that people could create long-term wealth through lowrisk investment options that came with attractive tax incentives.

In recent times, however, the interest rates of these schemes have come down, and investors have turned to more lucrative market-linked options like stocks and mutual funds. Besides, the new tax regime has reduced the attraction for tax benefits linked to investment options. Yet, the low risk and sovereign guarantee make these schemes attractive for certain segments of the population.

Origin of savings schemes

Some historians attribute the origin of small savings schemes to pre-colonial times, when the Post Office Savings Bank of India was established in 1882. After independence, the schemes got an impetus with the setting up of the National Savings Organisation in 1948. Eventually, several schemes like the Post Office Monthly Income Scheme and Kisan Vikas Patra were introduced.