Introduction:

Small Saving Schemes are an attractive option for simple tax saving instruments. In
the hands of the investors’, these are considered as a good return provider, if they are not too
particular about the lack of liquidity of such schemes. These small saving schemes have been
time-honored tax saving vehicles, designed to provide safe and attractive investment options
to the public, at the same time to mobilize resources for development. Instruments that are
now linked to government securities (G-Secs) include one, two and three-year post office
term deposits, Kisan Vikas Patra (KVP), and five-year recurring deposit (RD), different
Long-term instruments like Public Provident Fund (PPF), Senior Citizen Savings Scheme,
five-year National Savings Certificate (NSC), and Sukanya Samriddhi Accounts are
considered as Small Savings Schemes.
Even after the sharp fall in interest rates, post-office small savings instruments remain
indispensable for marginal tax-payers as they combine tax rebates with stable returns and
zero risk. Over the few years, interest rates have minimized substantially, yet investors
continue to queue up for Post-Office Savings Schemes (POSSs). For the vast majority of
Indians, POSSs continue to be one the most traditional and trusted ways of saving their
money. Their relatively low interest rates don't seem to have dimmed the enthusiasm either it
seems that the generous dollop of tax breaks more than adequately offsets that drawback.
Another advantage of these types of schemes is that cheques issued by the post office can be
easily deposited in your bank account or used anywhere in the country.

Analysis and Presentation of the Case:

Still, because most of these schemes are sugar-coated with tax benefits, they do
involve some kind of lock-in period. If you do find yourself in need of emergency funds,
however, you can always use your postal deposits as collateral to raise a bank loan. With
hundreds of post offices across the country, it's easy to learn about and invest in a post office
scheme. In addition, there are hundreds of financial agents who will do all the paperwork for
you.
The most popular Small Savings Schemes includes Public Provident Fund, National
Savings Certificate, Kisan Vikas Patras, Senior Citizen Savings Scheme, Sukanya Samriddhi
Yojana etc. Let's look at each one in turn.
 Public Provident Fund (PPF): Undoubtedly, one of the most preferred tax-saving
instruments for many Indian tax-payers. The Public Provident Fund (PPF) Scheme,
1968 is a tax-free savings avenue that was introduced by the Ministry of Finance
(MoF) in India in the year 1968. Interests earned on deposits in the PPF account are
not taxable. Deposits made towards PPF accounts can be claimed as tax deductions.
This makes the PPF Scheme one of the most tax efficient instruments in
India. Investors’ can open a PPF account with a post office or any branch of any
authorised nationalised banks. A 15-year scheme, Investors’ need to invest a minimum
of Rs 500 to open an account and can invest up to a maximum of Rs 1,50,000 in any
financial year. The investment can either be in a lump sum or instalments (not more
than 12 in any year). The current rate of interest on this scheme is 8.1 per cent (This
rate has been revised in the Union Budget 2016 for FY: 2016 – 17, previously it was
8.7 per cent) compounded annually. Withdrawals and loans are allowed against an
PPF account, but there are certain conditions. Withdrawals can be made only from the
seventh year; that can be followed by one withdrawal every subsequent year.
Withdrawals are capped at 50 per cent of the balance at the end of the fourth
preceding year or the year immediately preceding the year of withdrawal, whichever
is lower.

Page 1 of 5
  National Savings Certificate (NSC): Another well-known savings vehicle, it's
designed to enable every Rs 100 of investment to grow to Rs 147.61 (if it is purchased
on or after 01.04.2012), at the end of the stipulated tenure of five years. That
translates into an 8.1 per cent return, compounded half-yearly. Maximum available
investments up for tax deduction is limited up to Rs 1,00,000 in any financial year.
One unique feature about the NSC is that all interest accrued until the fourth year is
considered to be re-invested in the scheme. They can also be encashed before the end
of their tenure. Investor will receive the principal and interest, although this will
effectively be at a lower rate.
 Kisan Vikas Patra (KVP): This scheme is designed to double the investors’ money
in a specified period of time. With slipping interest rates, this period of time has
lengthened in recent years. Currently, investors’ can double their investments in nine
years and two months. KVPs are available in denominations of Rs 1000, 5,000,
10,000 and 50,000. The Certificate can be encashed after 2 & 1/2 years from the date
of issue.
 Senior Citizen Savings scheme (SCSS): A spread of 100 basis points in Senior
Citizen Savings scheme is boon for retirees when inflation is considered. The current
interest rate for the current financial year is declared at 8.6 per cent which is
comparable to what bank FDs are offering today. Coupled with tax benefit under
section 80C the product hold good for investors. An individual of the age of 55 years
or more but less than 60 years who has retired on superannuation or under VRS can
also open account subject to the condition that the account is opened within one
month of receipt of retirement benefits and amount should not exceed the amount of
retirement benefits. The maturity period of this schemes are also five years. A
depositor may operate more than one account in individual capacity or jointly with
spouse (husband/wife). There shall be only one deposit in the account in multiple of
INR.1000/- maximum not exceeding INR 15 lakh. Investment under this scheme
qualifies for the benefit of Section 80C of the Income Tax Act, 1961 from 1.4.2007.
 Sukanya Samriddhi Yojana (SSY): A legal Guardian/Natural Guardian can open
account in the name of Girl Child. A guardian can open only one account in the name
of one girl child and maximum two accounts in the name of two different Girl
children. Account can be opened up to age of 10 years only from the date of birth. For
initial operations of Scheme, one year grace has been given. With the grace, Girl child
who is born between 2.12.2003 &1.12.2004 can open account up to1.12.2015.
Minimum Rs. 1000 and Maximum Rs. 1,50,000 can be invested in a financial year.
Subsequent deposit in multiple of INR 100/- Deposits can be made in lump-sum No
limit on number of deposits either in a month or in a financial year. Rate of
interest 8.6 per cent per annum (w.e.f 1-4-2016) will be available which are calculated
on yearly compounded basis. If minimum Rs 1000/- is not deposited in a financial
year, account will become discontinued and can be revived with a penalty of Rs 50/-
per year with minimum amount required for deposit for that year. Partial withdrawal,
maximum up to 50% of balance standing at the end of the preceding financial year
can be taken after Account holder’s attaining age of 18 years. And the account can be
closed after completion of 21 years.

In a move which could disappoint many small savers here in India, Finance Ministry
decided to reduce interest rates on many of its small saving schemes, including Public
Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC)
and Senior Citizen Savings Scheme (SCSS) among others. These rates are effective April 1,

Page 2 of 5
2016 and will be subject to a quarterly revision based on a new formula to determine these
rates.

Table 1: Comparison among different Small Savings Investment Avenues

Nam Minimum Maximum Previous Current Tax Benefits (if Maturity
e Investment Investment interest interest any) (in years)
(in Rs.) (in Rs.) rate (up to rate (up
31.03.16) to
31.03.16)
PPF 500 150000 8.70 8.10% Interest is 15
completely tax-
free. (Tax
savings: under
section 80C up
to Rs. 1.5
Lakhs)
NSC 100 No limit For 5 years 8.10% Up to Rs. For VIII th
8.50% and 1,50,000 (under issue- 5
For 10 section 80C) years
years - For IX th
8.80% issue 10
years.
KVP 1000 No limit 8.70 7.80% No such Major 110
Tax benefit is months
available
SCSS 1000 1500000 9.30 8.60% Investment 5
under this
scheme
qualifies for the
benefit of
Section 80C of
the Income Tax
Act, 1961 from
1.4.2007.
Source: http://www.indiapost.gov.in/POSB.aspx

In view of the above the following case may be solved:

Should the investors be worried?

In the budget 2015-16 we can see that the interest rate in every scheme have been decreased
for that investors are quite worried about the future of their investment and about the return.
In a move which could disappoint many small savers here in India, Finance Ministry today
decided to reduce interest rates on many of its small saving schemes, including Public
Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), National Savings Certificate (NSC)
and Senior Citizen Savings Scheme (SCSS) among others. These rates will be effective April
1, 2016 and will be subject to a quarterly revision based on a new formula to determine these
rates.
Public Provident Fund (PPF) – There has been a significant cut in the interest rate offered
by PPF, India’s most popular small savings scheme. PPF will earn you 8.10% for the next
financial year as compared to 8.7% for the current financial year. However, interest rate on

Page 3 of 5
PPF continues to remain tax-exempt on maturity and investment up to Rs. 1,50,000 will keep
getting exemption under section 80C.
National Savings Certificates (NSCs) – Effective December 20, 2015, the government
stopped issuing 10-year NSCs. Now even 5-year NSCs will have a rate cut, from 8.50% to
8.10%. Your investment in NSCs will keep giving you tax exemption under section 80C.
Kisan Vikas Patra (KVP) – Your investment in KVP was promised to get doubled in 100
months earlier. But, from April 1, you’ll have to wait for 10 months more to get the same
benefits. Effectively, this scheme will earn you 7.85% now. From the above discussion we
can see that the rates have decreased so the investors should think again and again before
investment that in future the rate may be decreased again.
Senior Citizens Savings Scheme (SCSS) – Senior citizens will also feel disappointed as the
interest rate on Senior Citizen Savings Scheme has also been reduced to 8.60% from 9.30%
earlier. The interest earned on this scheme is taxable and subject to TDS as well. But, the
investment made gets you a deduction of up to Rs. 1,50,000 under section 80C.
Sukanya Samriddhi Yojana (SSY) – Government’s pet scheme for girl child, Sukanya
Samriddhi Yojana, has seen a rate cut to 8.60% from its present rate of 9.20%. But, there is
still a gap of 0.50% between this scheme and PPF, which would likely keep its popularity
intact. Interest earned on Sukanya Samriddhi Yojana is also tax-exempt on maturity and
investment up to Rs. 1,50,000 will keep getting exemption under section 80C.
Post Office Monthly Income Scheme (POMIS) – Post Office Monthly Income Scheme will
also have a steep cut in interest rate from an earlier 8.40% to 7.80% effective April 1.
Following this rate cut, Post Office MIS will go out of favour with many of the investors.
From the above discussion we can see that the rates have decreased so the investors should
think again and again before investment that in future the rate may be decreased again.

How the situation will change if small savings rates were to indeed
come down again in near future?
The 25-basis points reduction in interest rates on short-tenure small savings schemes from
April 1 may have come as a huge disappointment for countless savers. For the middle class,
especially for millions of retired persons, these schemes are risk-free, and provide safe
parking slots for their hard-earned money. The returns these schemes offer also help them
balance their budget. The Reserve Bank of India cut the key policy rate by a total of 125 basis
points in 2015, and it has only been partially transmitted to end-borrowers. In fact, a little less
than half of this reduction had been passed on by banks to their clients. By leaving the
interest rates on long-term and certain special category savings schemes unchanged, the
government has sent out the message that it has in mind the larger good of society as a whole,
and that it is keen to encourage people to save for the future. A distorted interest regime is the
principal cause for driving the economy into a costlier zone. For individuals, no doubt, the
impact of the interest rate cut on small savings schemes could be immediate and visible in
terms of lower returns on their savings. However, the effect of such a cut will have a
cascading effect on the entire value chain, and will inevitably bring the cost structure down
for the economy. Surely, that is the right way to go. The government has indeed done well to
take this less-than-popular step.
It the investment rate will decrease again the whole investment structure will change. Again
the investors will thing where to invest or where not. If again the rate is decrease then they
will think that the market opportunity for post office investment is not good and they will find
the alternative investment schemes to invest.

Page 4 of 5
 So what options should senior citizen investors look at?

Most of the people rely on employer sponsored benefit plans Viz. Pension, Provident Fund
etc. to survive during their retirement. The wish deep down to enjoy life after meeting all the
responsibilities in life dies due to lack of financial resources. I should rather say lack of
planning and awareness with regard to available income options to make retirement
comfortable. Besides traditional pension plans, gratuity and PF, there are many investment
tools available for senior citizens, which carry no risk, and are tax efficient too. It is advised
to have a diversified investment portfolio for safe and better returns instead of putting all
your money in savings account of single investment tool and suffer a loss. For retirement
planning, be sure of investing in schemes offering long-term stability and aggressive products
that offer high returns on investment.

References
For conducting this analysis the following web links were accessed:
 http://www.indiapost.gov.in/POSB.aspx
 http://www.thehindu.com/
 http://articles.economictimes.indiatimes.com/
 http://www.business-standard.com/

Page 5 of 5