Fixed Income: Lock into small savings for higher returns


An individual can also open a recurring deposit account where the monthly interest will be deposited for five years and also earn recurring deposit interest rate of 5.8%.

At a time when banks have reduced their deposits rates, small savings schemes remain most attractive for risk-averse investors. Currently, there is a difference of 130 basis points between five-year SBI fixed deposits rate and five-year Post Office Time Deposit rate.

The interest rates of small savings schemes are reset every quarter depending on the bond yield. The rates for the third quarter of financial year 2020-21 (starting from October 1 to December 31) will be notified on October 1. Analysts say risk-averse individuals should invest in small savings schemes such as five-year time deposits, National Savings Certificate, Monthly Income Scheme, Kisan Vikas Patra and Sukanya Samriddhi Account which are offering much higher rates than bank deposits.

Post Office Time Deposits
Like bank deposits, post offices offer fixed deposits of one, two, three and five years. An investor can open a single account or a joint account, and invest minimum Rs 1,000. There is no maximum limit. The interest is payable annually but calculated quarterly. No additional interest will be paid on the amount of interest that has become due for payment but not withdrawn by the account holder.

The account can be transferred from one post office to another and any number of accounts can be opened in any post office. Premature encashment is not allowed before six months. If the fixed deposit is closed between six to 12 months from date of opening of the deposit, then the Post Office Saving Accounts interest rate (currently 4%) will be paid.

The investment in five-year time deposit will get benefit of Section 80C of the Income Tax Act, for up to Rs 1.5 lakh a year. The interest earned is taxable at one’s marginal rate. At present the interest rate for one, two and three-year time deposits is 5.5% and for a five-year deposit it is 6.7%. In contrast, while the one-year deposits rate for SBI is 5.1%, it is 5.4% for a five-year deposit.

Monthly Income Scheme
A popular small savings scheme, Monthly Income Scheme (MIS) in the post office offers an interest rate of 6.6%. You can invest Rs 4.5 lakh in a single-owned account, and Rs 9 lakh in a joint account. The maturity period is five years. The interest paid every month can be drawn through auto credit into a savings account. If the MIS account is with a CBS Post Office, then the monthly interest can be credited into a savings account standing at any CBS post office. An individual can also open a recurring deposit account where the monthly interest will be deposited for five years and also earn recurring deposit interest rate of 5.8%.

The MIS can be prematurely encashed after one year but before three years at the discount (deduction from the deposit of 2% of the deposit and after three years at the discount of 1% of the deposit). While there is no tax deducted at source on MIS, the individual will have to pay tax on the interest earned at his marginal tax rate.

National Savings Certificate
The five-year National Savings Certificate is offering an interest rate of 6.8% compounded annually but payable at maturity. The deposits qualify for tax rebate under Section 80C. Earlier, physically pre-printed NSC certificates were issued by post offices. However, from July 2016 they are issued in passbooks. You can invest a minimum amount of Rs 1,000. There is no maximum limit.

You can also buy NSC from public sector banks and a few private sector banks. You can give the certificates as collateral for loans from banks or non-banking financial institutions. The corpus—principal and interest earned—is paid to the investor at the time of maturity. While no TDS is deducted, you have to pay tax on the interest earned at your marginal rate.

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