Investors in small financial savings schemes have a purpose to rejoice, particularly if they’re senior residents. Interest charges on 5 small financial savings schemes—Senior Citizen Savings Scheme (SCSS), National Savings Certificate (NSC), Monthly Income Savings Scheme, Kisan Vikas Patra (KVP) and publish workplace time deposits—have been hiked by 20-110 foundation factors (bps) for the January-March quarter (see desk). One foundation level is one-hundredth of a proportion level.
Interest charges on the Public Provident Fund (PPF) and Sukanya Samriddhi Scheme (SSY) remained unchanged, at 7.1% and seven.6%, respectively. A hike within the charge for PPF may very well be overdue because the 10-year G-sec yield is hovering at 7.3%. As per the formulation used to derive financial savings scheme charges, the PPF charge must be 25 bps increased than the common quarterly yield of 10-year G-sec. Rates of schemes with shorter maturity (5 years or much less) tail the repo charge.
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Cheer for senior residents
The rate of interest on SCSS has been hiked by 40 bps to eight%. Experts say it’s alternative for senior residents . “I imagine senior residents can simply dedicate a minimum of 50% of their corpus to SCSS on the present charge as a part of retirement planning,” said Kalpesh Ashar, founder of Full Circle Financial Planners and Advisors and a Sebi-Registered Investment Adviser (RIA).
The 8% interest rate onSCSS is higher by 25-50 bps than the highest fixed deposit (FD) rates offered by major banks to senior citizens (see table). “Senior citizens should not fall for the bait of high rates offered by small co-operative banks and corporate FDs and just stick to major private and PSU banks,” mentioned Ashar.
SCSS charges had been hiked within the September 2022 quarter as nicely, however an additional hike seems to be unlikely, say specialists. “Inflation is in management so I don’t count on SCSS or FD charges to go increased within the subsequent quarter,” said Nitesh Buddhadev, founder, Nimit Consultancy. “This (January-March) is also the time when most people rush to make tax saving investments and SCSS offers up to ₹1.5 lakh deduction on principal at the time of investment,” he added.
Ashar mentioned a senior couple can put in as much as ₹30 lakh in SCSS. “If a senior citizen couple is ready to make investments ₹15 lakh every, supplied the corpus is obtainable, at 8% rate of interest for 5 years, it may be one of many essential parts of retirement planning.”
Take word that curiosity from SCSS is taxed at earnings tax (I-T) slab charges, as is the case with FDs. This can considerably prune down the ultimate returns for these in increased tax brackets. As a common rule, monetary planners advise these within the 30% tax bracket (having earnings above ₹10 lakh) in opposition to investing in merchandise which might be taxed on the I-T slab stage. Senior residents get a deduction as much as ₹50,000 on curiosity earnings earned from small financial savings schemes and banks and publish workplace deposits.
SCSS comes with a 5-year lock-in and the curiosity is paid quarterly.
Post workplace deposits: yay or nay
Post workplace deposits throughout 1-, 2- and 3-year buckets are the most important gainers with a 110 bps hike in charge. The 5-year deposit curiosity rose by a nominal 30 bps. At present charges of 6.6%-7%, time deposits are 20-40 bps decrease and in some circumstances, at par with financial institution FDs of comparable maturity buckets.
Should you go for time period deposits or financial institution FDs?
In phrases of security, they rating increased as publish workplace deposits are authorities backed, whereas financial institution deposits are insured solely as much as ₹5 lakh. Bank FDs provide higher flexibility with tenures. As for returns and taxation, there may be not a lot distinction between the 2. “Post workplace deposits are uncared for due to their sheer construction. Bank FDs provide ease of investing in and accessing FDs on-line, whereas publish places of work nonetheless require a bodily go to,” said Ashar.
NSC rate has increased by only 20 bps, but given the tax benefits it offers, it is an attractive option. It offers tax deduction of up to ₹1.5 lakh on the principal and interest from second year onwards can be claimed as deduction as it gets reinvested. Interest received in the fifth year is taxable at I-T slab rates. In line with NSC, the rate on RBI floating bonds have also gone up to 7.35%.
Small savings vs debt funds
Experts say it is not fair to compare the two. But from a performance perspective, debt mutual funds offer better tax efficient returns. Debt funds held for over three years get indexation benefit, which means that the purchase price is increased to adjust for inflation during the holding period. This reduces the otherwise long-term capital gains (LTCG) tax of 20% on debt funds significantly and even makes it zero for the periods of high inflation, as is the case in the last one year.
Vijai Mantri, chief mentor and co-promoter, JRL Money, said compounding also gives debt funds an edge. “SCSS’s 8% is simple interest, whereas MFs gain from compounding. A debt fund giving 7.3% annual return invested for 10 years will yield 10% compounded interest,” he mentioned.
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