Small Savings Instruments

Small Savings Schemes are a collection of savings instruments run by the federal government. It aims to encourage all residents, regardless of age, to save consistently. They are well-liked because they offer perks such as a sovereign guarantee, tax advantages, and returns that are typically higher than bank fixed deposits. The Finance Ministry has reassessed the interest rates for modest savings plans. The interest rates have been reviewed every three months since 2016. The National Small Savings Fund collects all deposits made through different small savings programs. The central government uses the funds to pay for its budgetary deficit. Small savings programs are created to offer the public secure and alluring investment options while simultaneously mobilizing funds for development. 

The programs can be divided into social security programs, savings certificates, and post office deposits.

Social Security Programs:

A minimum income for those in need and a decent replacement income for those who have contributed in accordance with their level of income are the two main goals of the majority of social security programs. Public Provident Fund, Sukanya Samriddhi Account, and Senior Citizens Savings Scheme are at the top of the social security pyramid.

• Public Provident Fund: The National Savings Institute introduced a post office savings program in 1968. The Public Provident Fund is a well-liked savings option for long-term objectives like retirement. The minimum amount is 500/ annum. The Ministry of Finance decides the interest rate on PPF at the start of each quarter. It has an annual yield of 7.1% and is exempt from taxes under Section 80 C of the Income Tax Act. The account can be extended forever in blocks of 5 years after it matures after 15 years. The total sum and interest earned are tax-free at the time of withdrawal.
• Sukanya Samriddhi Account: In 2015, the Beti Bachao Beti Padhao campaign introduced the Sukanya Samriddhi Account. It was created specifically for girl children. A girl under ten can have an account opened in her name and the maximum number of accounts allowed per family is two with a minimum deposit of 250 rs. The program is eligible for a tax break under Section 80 C of the Income Tax Act. It promises an annual return of 7.6%. A maximum of Rs 1.5 lac can be invested in a year, and the deposit has a 21-year term from the account opening date. The investment will mature after 21 years since the account was opened or when the girl kid marries after turning 18 years old. If the girl kid loses her Indian citizenship or becomes an NRI, the account must be cancelled. If the girl passes away too young or develops a condition that makes her life in danger, premature withdrawals are permitted.
• Senior Citizens Saving Scheme: Any person over 60 may start a 5-year Senior Citizen Savings Account. It bears a 7.4% annual interest rate that is due every quarter and is tax-deductible under Section 80 C. Individuals can invest up to Rs. 15 lac (total balances across all accounts). The initial deposit must be at least Rs. 1000.

Saving Certificates:

The National Savings Certificate is a fixed-income investment program offered by the Government of India that is simple to open at any post office. It is a savings bond program that entices participants, mainly low- to middle-income investors, to invest while reducing their income tax liability under Section 80 C. The National Savings Certificate and the Kisan Vikas Patra are under the category of savings certificates.

• The National Saving Certificate: After five years, the National Savings Certificate matures and begins to pay interest at a rate of 6.8% annually. Every year, the scheme automatically reinvests the interest that has been earned. In accordance with Section 80 C of the Income Tax Act, the NSC is also eligible for tax savings. The minimum deposit is in multiples of Rs. 100 and is set at Rs. 1000. There is no upper bound.
• Kisan Vikas Patra: Introduced by India Post in 1988 to facilitate people to invest in a long-term savings plan. The Kisan Vikas Patra, available to everyone, doubles your initial investment after 124 months, resulting in an annualized return of 6.9%. There is no maximum investment amount; the minimum is Rs 1000. Its original purpose was to help farmers save money over the long term, hence the name. It is now accessible to everyone.

Post Office Deposits:

Savings deposits, recurring deposits, time deposits with maturities of 1, 2, and 3 years, and monthly income accounts, are all included under Post Office Deposits. It enables individuals who make regular deposits to make a fixed monthly deposit for a five-year term and earn returns at fixed deposit rates. Monthly payments for accounts must be at least Rs 100. Any native Indian citizen who is at least 18 years old may open a post office account. Additionally, minors can open and manage the account jointly with their guardian if they are ten years old or older.

• The Saving Account: With a minimum initial investment of Rs. 500, an individual or joint savings account can be opened at the current 4% annual interest rate.
• The Recurring Account: The recurring deposit matures 60 months after the opening date and pays 5.8% annually compounded. Investors are given the option to save monthly with a minimum commitment of Rs 100.
• The Time Deposits: Time deposits at the post office resemble fixed deposits. A Rs 1,000 minimum deposit is needed to start a time deposit. Time deposits for one, two, and three years receive interest at a rate of 5.5%, while those for five years earn interest at a rate of 6.7% annually.

Let’s have a look at current interest rates;

Small Saving Instrument	Interest rates for Q2 (2022-2023)
Public Provident Fund	7.1%
National Saving Certificate	6.8%
Sukanya Samriddhi Yojana	7.6%
Saving Deposit	4%
Term Deposit	5.5-6.7%
Recurring Deposit	5.8%
Kisan Vikas Patra	6.9%

Issues Related to Small Saving Instruments:

1. Negative Real Returns: Due to the current high inflation, all small savings instruments, except PPF and Sukanya Samriddhi Yojana, are currently yielding negative real returns.
2. Low Savings Rates and Benchmark Government Bond Yields are Correlated: However, the government has not raised interest rates despite the rise in G-Sec yields.
3. Depositors are Incurring Losses: While the one-year bank fixed deposit rate is about 5.3%, inflation has risen to above 7%. It implies that after accounting for inflation, depositors are losing money.
4. Retail Price Inflation: Despite being higher than banks’ fixed deposit rates, the current rates on modest savings plans may have dissatisfied savers, given that retail inflation reached 7.97%.
5. The Nation Lacks an Adequate Social Security System: Technically speaking, negative real rates encourage spending and discourage saving. This could then increase inflation and result in even lower real rates.

Implications of Small Saving Instruments:

1. Stock exchanges: Savings are moving away from mutual funds and stocks into bank deposits due to the high volatility brought on by rising rates and overseas portfolio outflows.
2. Equities: Although it is possible to plan and invest in a decent debt instrument that will provide superior returns, experts agree that stocks are the most crucial choice for outpacing inflation and producing favorable real rates of return.
3. Now, banks are less inclined to pursue a significant increase in deposit rates: Since the government increased deposit rates, they would have been compelled to raise deposit rates much more to stop money from banks flowing to small savings schemes.

Benefits of Small Saving Instruments:

1. Retirement Fund: Long-term investments are appropriate for putting money aside for your golden years. Regularly investing small amounts will aid in building a solid retirement fund. Additionally, starting early has benefits; the longer the term, the greater the rewards. Consequently, one can live a relaxed and happy retirement life.
2. Tax Savings: Many small savings plans provide investors with tax advantages. For instance, under Section 80 C of the Income Tax Act of 1961, the investment made into the program will be eligible for a tax deduction. The maturity amount and some interest are also tax-free at the same time.
3. A saving Behavior:  Investors can consistently save small sums of money by participating in small savings plans. These investments yield substantial profits and have a long investment horizon. Additionally, regularly setting aside a little money helps reduce wasteful spending. Consequently, investing in one of these programs fosters the habit of saving.
4. Security: Putting money into one of the programs will help you secure your future. Additionally, investing your money is usually better than keeping it liquid. Additionally, since the Government of India is backing the majority of the projects, there is zero possibility of default.

Conclusion:

Approximately 1.54 lac post offices are used to run these programs nationwide. In addition to post offices, the Public Provident Fund Scheme is run through around 8000 branches of public sector banks. Deposit Plans for Retiring Employees are only offered through a few public sector bank locations. They are well-liked because they offer perks such as a sovereign guarantee, tax advantages, and returns that are typically higher than bank fixed deposits. Small savings have become a significant source of borrowing for the government throughout time. They were responsible for almost 13% of the gross fiscal deficit of the center 20 years ago. Currently, they make up around 20% of the central government’s borrowing needs. Every three months, the Indian government sets the interest rates for various savings programs. By the end of this month, the center will reveal the new interest rates for July and September 2022. It is anticipated that increased g-secs will increase these schemes’ interest rates.

Note: Despite strong inflation and rising interest rates, the government maintains the interest rates on NSC and PPF for the second quarter of 2022–2023 at the same level. Interest rates for small savings plans are announced every three months. In the second quarter, the interest rate on the one-year term deposit plan will remain at 5.5%. The largest lender in the nation, the State Bank of India (SBI), increased the interest rate on a one-year fixed deposit to 5.10 percent after raising the benchmark rate twice in a row by 90 basis points to combat excessive inflation. In May and June, the Reserve Bank of India (RBI) increased the repo rate by 40 basis points and 50 basis points, respectively. Retail inflation in May was 7.04 percent, above the Reserve Bank of India’s tolerance level for the fifth consecutive month. The five-year interest rate of the senior citizens’ savings program will remain at 7.4%. The senior citizens’ scheme pays interest quarterly.