These government schemes are better than FD
Ever since the new tax regime has become attractive, a big question has arisen in the minds of taxpayers. The question is, does it now make any sense to invest in small savings schemes like Public Provident Fund (PPF), National Savings Certificate (NSC) and Senior Citizen Savings Scheme (SCSS)? Taxpayers who adopt the new tax system do not get exemption on investment under Section 80C of the Income Tax Act. Traditionally, Indian investors chose these schemes so that they could save tax. Now that it has been removed, many investors are running straight towards fixed deposits (FD), because there is no lock-in period (time limit for keeping money deposited). But is this hasty decision right? If we delve deeper into the figures and returns, the story tells a different story.
Government savings schemes are overshadowing FD
First of all let’s talk about profit, i.e. interest rate. It is very important to compare how much increase you get by keeping money in the bank and how much increase you get in government schemes. If we look at the current market situation, most of the banks are giving interest around 6 to 6.5 percent annually on their fixed deposit (FD) schemes.
In sharp contrast, small savings schemes supported by the government are still giving returns of more than 7 percent. Look at the statistics.
- Post Office Monthly Income Scheme: 7.4% interest.
- Senior Citizen Savings Scheme (SCSS): 8.2% interest.
- Kisan Vikas Patra (KVP): 7.5% interest.
- PPF: 7.1% interest.
- Sukanya Samriddhi Yojana: 8.2% interest.
These figures clearly show that if you consider only returns as a yardstick, then government schemes are far ahead of bank FDs. Getting returns of more than 8 percent without any risk is a big deal in today’s times.
Whose scissors use more on earnings?
While investing, it is not enough to just look at the interest rate, it is also important to see how much money comes into your pocket after tax is deducted. A major feature of small savings schemes is that even in the new tax regime, the tax impact on the income from them can be less or zero as compared to FD (especially in schemes like PPF and Sukanya Samriddhi).
Let us understand this with a simple example. Suppose a bank is giving you 7% interest on FD. If you fall in the 10% tax slab, you will have to pay 10% tax on that interest income. This means that after deducting tax, your real profit (Net Return) will reduce to just 6.3%.
On the other hand, the interest received in schemes like PPF and Sukanya Samriddhi is completely tax-free, no matter which tax regime you are in. That means the entire 7.1% or 8.2% that you are seeing will go into your pocket. Despite not getting 80C exemption in the new tax regime, the tax-free interest makes these schemes more attractive than FDs.
Lock-in period, not compulsion
Often investors lean towards FD because they feel that their money will get stuck (Lock-in). But from the point of view of financial discipline, the lock-in period of small savings schemes is actually a boon.
When you put money in PPF, where there is a lock-in of 15 years, you are unknowingly creating a huge corpus for your retirement. Similarly, by investing in Sukanya Samriddhi Yojana, you secure a fixed amount for your daughter’s future. The money in FD is liquid (can be withdrawn quickly), so people often spend it on small needs and bigger goals are left behind. For long-term wealth creation, it is very important to lock the money for some time.
How to balance your portfolio?
Now the question arises that what strategy should a common investor adopt? Should we invest all the money in government schemes? Delhi-based chartered accountant and wealth advisor Deepak Aggarwal says that balance in investment is very important.
Deepak Aggarwal advises, “It is prudent to invest about 30% of your portfolio in fixed income instruments to build long-term wealth. When your financial goals are 15 years away or more, do not depend only on FDs. You should have a mix of gold, debt funds and especially small savings schemes like PPF and Sukanya in your portfolio along with FDs.”