PPF and Sukanya Samriddhi are most attractive in small-savings basket

Senior Citizens' Savings Scheme remains a must-have for those who need regular cash flows after retirement

On September 29, the government hiked the interest rate on several small saving schemes by 10-30 basis points (bps). There was an increase in the interest rates on two-year time deposit (new rate 5.7 per cent), three-year deposit (5.8 per cent), Senior Citizens Savings Scheme (SCSS, 7.6 per cent), monthly income account (6.7 per cent), and Kisan Vikas Patra (7 per cent). Rates on Public Provident fund (PPF, 7.1 per cent), Sukanya Samriddhi Yojana (SSY, 7.6 per cent) and National Savings Certificate (NSC, 6.8 per cent) remained unchanged.

“In a rising interest-rate scenario, when returns on all fixed-income products are increasing, these hikes have not altered the relative attractiveness of small-savings instruments much,” says Renu Maheshwari, Sebi-registered investment advisor, co-founder and principal advisor, Finscholarz Wealth Managers.

Three products from the small-savings basket are most attractive.

PPF

Investors get exempt-exempt-exempt (EEE) tax treatment here. “PPF’s 7.1 per cent tax-free return is equivalent to a pre-tax return of around 10 per cent for someone in the 30 per cent tax bracket, a fantastic rate for a low-risk product,” says Deepesh Raghaw, founder, PersonalFinancePlan, a Securities and Exchange Board of India-registered investment advisor.

Says Arvind A Rao, certified financial planner and founder, Arvind Rao & Associates: “It is an ideal tool for retirement saving, especially for the self-employed who don’t have access to Employees Provident Fund.”

While SSY and SCSS also offer high returns, they are limited to specific target groups. “PPF is a universal product,” says Raghaw.

PPF’s one shortcoming is that you can't invest more than Rs 1.5 lakh annually in it. You also need a long investment horizon. “When viewed as a retirement saving tool, however, the long lock-in becomes a positive,” says Rao.  

SSY

SSY offers a rate of return (also tax free) higher than the PPF. “It is a very good product for those who have a girl child,” says Maheshwari.

You must open this account when your daughter is less than 10 years old. Be prepared for a long lock-in. Up to 50 per cent of the corpus can be withdrawn after your daughter has completed Class X. The account matures after 21 years from the date of opening and can’t be extended.  

A person moving abroad with his daughter must close the SSY account on day one. “If this is not done and they find out, they will pay you a rate of return equivalent to the savings account interest rate,” says Raghaw.

SCSS

SCSS pays quarterly interest. “It can hence meet senior citizens’ need for regular cash,” says Rao. The rate remains locked for five years.  

Unlike PPF and SSY, the interest paid on SCSS is taxable at slab rate, which lowers the post-tax return for senior citizens in the higher tax brackets. There is also a cap on investment of Rs 15 lakh per senior citizen.

All three products offer Section 80C deduction.

Other attractive fixed-income options

Barring PPF and SSY, all other small-savings products offer returns that are taxed.

After exhausting the SCSS limit, senior citizens may consider Prime Minister Vaya Vandana Yojana (PMVVY), which is also sovereign-backed, pays 7.4 per cent interest (taxable) and has 10-year tenure.      

Non-senior citizen investors may consider Reserve Bank of India Floating Rate Bonds, which offer 7.15 per cent interest (taxable) and have seven-year lock-in.                      

Beyond sovereign back instruments, investors may consider fixed deposits (FDs) from scheduled commercial banks whose rates may rise further in the near future due to rising pace of credit growth. “If you withdraw money from a bank FD prematurely, the penalty charged will be lower than in SCSS,” says Raghaw.

With yield to maturity (YTM) of debt funds having risen significantly, they have also turned attractive. The tax paid after indexation, if you invest for more than three years, is likely to be low in the current high inflation scenario. Consider investing in target maturity funds of a desired horizon as they have low credit risk. They also carry low interest rate risk if held till maturity.

PPF can serve as pension tool

• Once PPF matures after 15 years, you can extend it (indefinitely in blocks of 5 years) either without contribution (default option) or with contribution
• If you extend it with contribution, you will be allowed to withdraw up to 60 per cent of the balance on the date of extension over the next 5 years
• If you extend the account without contribution, you can withdraw any amount or close it anytime
• In both cases, only one withdrawal will be permitted per year
• A retiree who has accumulated, say, Rs 1 crore in his PPF account, can get a Rs 7.1 lakh tax-free annually that can act as his pension